Annual Report Report and Financial Statements 2004 Lisbon 2005
advertisement
Annual Report Report and Financial Statements 2004 Lisbon 2005 BANCO DE PORTUGAL Economic Research Department Control and Accounting Department Distribution Administrative Services Department Documentation, Editing and Museum Division Av. Almirante Reis, 71 1150-012 Lisboa Printing Tipografia Peres, S.A. Lisbon, 2005 Number of copies 1750 Legal Deposit no. 228138/05 ISSN 0870-0060 Management of the Bank I. Órgãos do Banco Governor Vítor Manuel Ribeiro Constâncio Board of Directors Governor Vítor Manuel Ribeiro Constâncio Vice-Governors António Manuel Martins Pereira Marta José Agostinho Martins de Matos Directors Manuel Ramos de Sousa Sebastião Vítor Manuel da Silva Rodrigues Pessoa José António da Silveira Godinho* * Appointed by Resolution No. 54/2004 (Series II) of 6 May 2004, published in the Official Gazette No. 118, Series II of 20 May 2004. Board of Auditors Chairman Emílio Rui da Veiga Peixoto Vilar Members Rui José da Conceição Nunes Modesto Teixeira Alves José Vieira dos Reis Board of Consultants Vítor Manuel Ribeiro Constâncio António Manuel Martins Pereira Marta José Agostinho Martins de Matos António Manuel Pinto Barbosa Manuel Jacinto Nunes José da Silva Lopes José Alberto Vasconcelos Tavares Moreira Luís Miguel Couceiro Pizarro Beleza António José Fernandes de Sousa Emílio Rui da Veiga Peixoto Vilar Miguel Ribeiro Cadilhe Valentim Xavier Pintado Almerindo da Silva Marques João Maurício Fernandes Salgueiro Franquelim Fernando Garcia Alves Roberto de Sousa Rocha Amaral Rui Manuel Teixeira Gonçalves * * Appointed by Resolution No. 139/2005 of 17 February 2005 of the Council of the Regional Government of Madeira. Heads of Department, Regional Delegations and District Agencies Office of the Governor and the Boards (GAB) Paulo Ernesto Carvalho Amorim Secretariat (SEC) Paulo Ernesto Carvalho Amorim Audit Department (DAU) José Cunha Nunes Pereira Control and Accounting Department (DCC) Vitor Manuel G. Pimenta e Silva Treasury and Issue Department (DET) Manuel Pimentel Castelhano Statistics Department (DDE) João António Cadete de Matos Economic Research Department (DEE) Maximiano Reis Pinheiro Human Resources Management and Development Department (DRH) António Pinto Pereira Market and Reserve Management Department (DMR) Rui Manuel F. Rodrigues Carvalho Organisation and Information Systems and Technology Department (DOI) Paulino A. M. Magalhães Corrêa International Relations Department (DRI) Paulo Ernesto Carvalho Amorim Administrative Services Department (DSA) Henrique Möller Miranda Legal Services Department (DJU) José Simões Patrício Payment Systems Department (DPG) Eugénio Fernandes Gaspar Banking Supervision Department (DSB) Carlos Eduardo Lemos Santos Pension Fund Helena Maria Martins Adegas Oporto Branch Manuel Maia Marques Regional Delegations Regional Delegation of the Azores Egberto T. Bettencourt Mendes Regional Delegation of Madeira Vítor Manuel Geraldes Ribeiro District Agencies Braga Maria Heliodora V. Geraldes de Matos Castelo Branco Maria João Botelho Simões Raposo de Sousa Coimbra António Albuquerque Évora Casimiro José Andrade Veloso Faro Abel Pereira Correia Vila Real João Reis Cariano Viseu João Maria Albuquerque Beirão Contents Responsáveis pelos Orgãos de Direcção e Delegações Contents CONTENTS Management of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V Board of auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII Heads of Departments, Regional Delegations, District Agencies and Delegations Abroad. . . . . . . . . . . XI PART I. PORTUGUESE ECONOMY IN 2004 Introductory note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Chapter 1 International environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Box 1.1 The integration of China in the world economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Box 1.2 Oil prices: recent developments and economic consequences . . . . . . . . . . . . . . . . . . . . . . . . 25 Economic policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Chapter 2 2.1 The monetary policy of the ECB and monetary and financial conditions of the Portuguese economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.2 Fiscal policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 2.3 Competitiveness and structural policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Box 2.1 The reform of the stability and growth pact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Box 2.2 Exchange rate of the euro and price competitiveness of Portuguese exports . . . . . . . . . . . . 44 Box 2.3 Recent developments in the market share of Portuguese exports in the European union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Box 2.4 Human capital as growth factor in the long run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Box 2.5 Nominal and real wage rigidity: a microeconomic approach . . . . . . . . . . . . . . . . . . . . . . . . 55 Output, expenditure and external accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 3.1 Output. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 3.2 Expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 3.3 Current and capital accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Chapter 3 Box 3.1 Some considerations on the impact of the European Football Championship on the Portuguese economy in 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Chapter 4 Employment and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Chapter 5 Prices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Banco de Portugal | Annual Report | 2004 XV Contents Chapter 6 Public finances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 6.1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 6.2 Current revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 6.3 Current expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 6.4 Capital revenue and expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 6.5 Public debt and deficit-debt adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Box 6.1 Budgetary effects of the temporary measures implemented from 2002 to 2004 . . . . . . . . . . . . 101 Chapter 7 Financial situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 7.1 Financial account and international investment position . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 7.2 Securities market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 7.3 Non-financial resident institutional sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 7.3.1 Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 7.3.2 Non-financial corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 7.3.3 General government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 7.4 Financial intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 7.4.1 Banking system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 7.4.2 Institutional investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 Developments in household wealth since the 1980s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Supplementary tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Box 7.1 PARTE II. REPORT AND FINANCIAL STATEMENTS Chapter 8 Activities of the Bank 8.1 Supervision of credit institutions and financial companies, the Guarantee of Deposits and the Mutual Agricultural Credit Guarantee Fund . . . . . . . . . . . . . . . . . . . . 193 8.1.1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 8.1.2 Regulatory framework governing the activities of institutions and the supervisory functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XVI 193 8.1.3 Supervisory activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 8.1.3.1 Developments in the universe of institutions . . . . . . . . . . . . . . . . . . . . . . . . . . 195 8.1.3.2 Monitoring of institutions and financial groups . . . . . . . . . . . . . . . . . . . . . . . . 196 8.1.4 Consultancy, research and information management activities . . . . . . . . . . . . . . . . . 197 8.1.5 Claims and breaches of regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 8.1.6 Co-operation with other supervisory authorities and international activity . . . . . . . 200 8.1.7 Deposit Guarantee Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 8.1.8 Mutual Agricultural Credit Guarantee Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 Banco de Portugal | Annual Report| 2004 Contents 8.2 Currency issuance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 8.2.1Banknote issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 8.2.2 Metal coins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 8.3 Payment systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216 8.3.1 Gross settlement systems: SPGT/TARGET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 8.3.2 Interbank clearing system: SICOI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219 8.3.3 Regulation and control of means of payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 8.4 Monetary policy implementation and management of the European Central Bank’s foreign reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 8.4.1 Monetary policy implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 8.4.1.1 Liquidity management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 8.4.1.2 Open market operations and standing facilities . . . . . . . . . . . . . . . . . . . . . . . . 222 8. 4.1.3 Euro money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 8.4.1.4 Minimum reserve system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 8.4.1.5 Eligible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 8.4.1.6 Review of the Eurosystem collateral framework . . . . . . . . . . . . . . . . . . . . . . . 226 8.4.2 Management of the European Central Bank (ECB)foreign reserves . . . . . . . . . . . . . . 227 8.5 Analysis and research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 8.6 Statistics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 8.7 International relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 8.8 Financial activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 8.8.1 Management of the Banco de Portugal’s own investment assets . . . . . . . . . . . . . . . . 235 8.8.2 Financial relations with the State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 8.9 Exchange authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 8.10 Internal organisation and management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 8.10.1 Human resources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 8.10.2 Pension Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 8.10.3 Organisation and information technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 8.10.4 Information and documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 8.10.5 Legal services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 8.10.6 Internal audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 8.10.7 Buildings and technical facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 Chapter 9 Financial Statements 9.1 Presentation and proposal for the distribution of results . . . . . . . . . . . . . . . . . . . . . . . . . . . 245 9.2 Financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252 9.3 Notes on the financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 Note 1: Bases of presentation and main accounting policies . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 Banco de Portugal | Annual Report | 2004 XVII Contents 1.1 Base of presentation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 1.2 Synopsis of the main accounting policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 Note 2: Gold and gold receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 Note 3: Lending and deposit operations with the International Monetary Fund (IMF) . . . . 261 Note 4: Balances with banks, security investments and other assets denominated in foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262 Note 5: Balances with banks, security investments and other assets denominated in euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262 Note 6: Lending to euro area credit institutions related to monetary policy operations denominated in euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263 Note 7: Intra-Eurosystem claims and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263 Note 8: Tangible and intangible fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 Note 9: Other financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268 Note 10: Off-balance-sheet instrument revaluation differences . . . . . . . . . . . . . . . . . . . . . . . . . . 268 Note 11: Accruals and prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 Note 12: Other assets – Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 Note 13: Banknotes in circulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 Note 14: Liabilities to euro area credit institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 Note 15: Debt certificates issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 Note 16: Liabilities to other euro area residents denominated in euro . . . . . . . . . . . . . . . . . . . . 270 Note 17: Liabilities to non-euro area residents denominated in euro . . . . . . . . . . . . . . . . . . . . . 270 Note 18: Liabilities to euro area and non-euro area residents denominated in foreign currency 270 XVIII Note 19: Accruals and income collected in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 Note 20: Other liabilities – Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 Note 21: Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272 Note 22: Revaluation accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 Note 23: Capital and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274 Note 24: Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 Note 25: Realised gains/losses arising from financial operations . . . . . . . . . . . . . . . . . . . . . . . . 276 Note 26: Write-downs on financial assets and positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276 Note 27: Income from equity shares and participating interests . . . . . . . . . . . . . . . . . . . . . . . . . 276 Note 28: Net result of pooling of monetary income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 Note 29: Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 Note 30: Staff costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 Note 31: Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 Note 32: Off-balance-sheet instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 Banco de Portugal | Annual Report| 2004 Contents Note 33: Retirement and survivors pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 9.4 External Auditor’s report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284 9.5 Report and opinion of the Board of Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 Banco de Portugal | Annual Report | 2004 XIX Tables TABLES PART I. THE PORTUGUESE ECONOMY IN 2004 Overview 1 Chapter 1 Portugal – Main economic indicators 2002-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 International environment 1.1 Developments in international tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.2 Gross domestic product and inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.3 External demand for Portuguese goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1.4 Financial markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Box 1.1 The integration of China in the world economy [1] The growth of the Chinese economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 [2] External openness of the Chinese economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 [3] Structure of Chinese exports by groups of products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Box 1.2 Oil prices: recent developments and economic consequences [1] Chapter 2 Effects of a 100 per cent increase in oil prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Economic policies 2.1 Euro area — exchange rates and interest rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2.2 Euro area — monetary and credit aggregates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2.3 Monetary and financial conditions of the Portuguese economy . . . . . . . . . . . . . . . . . . . 32 2.4 Structure and growth of general government current expenditure . . . . . . . . . . . . . . . . 36 Box 2.2 [1] [2] Exchange rate of the euro and price competitiveness of Portuguese exports Weights obtained for the effective exchange rate of exports and effective exchange rate index for Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Market share in major markets for Portuguese exports . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Box 2.3 Recent developments in the market share of Portuguese exports in the European Union [1] Portuguese exports to the EU15 and imports from the UE15 by main groups of products (nominal) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Banco de Portugal | Annual Report | 2004 49 XXI Tables Box 2.4 [1] Chapter 3 Human capital as growth factor in the long run Results of the 2003 Pisa programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Output, expenditure and external accounts 3.1 GDP and main expenditure components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 3.2 Gross value added by sector of activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 3.3 Household disposable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 3.4 Portuguese exports, foreign demand and market share . . . . . . . . . . . . . . . . . . . . . . . . . . 68 3.5 Net lending (+) / net borrowing (-) by sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 3.6 Current account and capital account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Chapter 4 4.1 4.2 Employment and wages Population, employment, unemployment and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Breakdown of employment by employment status and by type of employment contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 4.3 Employment, hours worked and average working hours . . . . . . . . . . . . . . . . . . . . . . . . 79 4.4 Quarterly average inflows and outflows between labour market states . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 4.5 Youth unemployment rate by level of education (aged 15-24) . . . . . . . . . . . . . . . . . . . . 81 4.6 Breakdown of the stock of employed persons by reasons for job seeking . . . . . . . . . . . 82 4.7 Labour mobility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Chapter 5 Prices 5.1 CPI – main aggregates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 5.2 Portugal— main price and cost indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Chapter 6 Public finances 6.1 Main fiscal indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 6.2 General government current revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 6.3 General government current expenditure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 6.4 General government capital revenue and expenditure. . . . . . . . . . . . . . . . . . . . . . . . . . . 97 6.5 Breakdown of the change in the general government debt ratio . . . . . . . . . . . . . . . . . . . 98 6.6 General government deficit-debt adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 Box 6.1 [1] Budgetary effects of the temporary measures implemented from 2002 to 2004 Main effects of the temporary measures included in general government accounts in the 2002-2004 period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXII 52 102 Banco de Portugal | Annual Report | 2004 Tables Chapter 7 Financial situation 7.1 Financial account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 7.2 International investment position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 7.3 Net issuance of securities by residents in the external and internal markets by institutional sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 109 Net issuance of securities by residents in the external and internal markets by type of instrument. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 7.5 Banking system balance sheet and profit and loss account . . . . . . . . . . . . . . . . . . . . . . . 115 7.6 Funds raised by resident institutional investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Box 7.1 Developments in household wealth since the 1980s [1] Financial assets structure in 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 [2] Development in household wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 PART II. REPORT AND FINANCIAL STATEMENTS Chapter 8 Activities of the Bank Institutions registered at 31/12/2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 Registrations (new institutions). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 Closing down of institutions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204 Developments in issuance – 2003/2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 Migration ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 Developments in banknotes put into circulation – 2003/2004 . . . . . . . . . . . . . . . . . . . . . 206 Withdrawals at ATMs – 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 Average value of banknotes in circulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 Developments in deposits - 2003/2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 Developments in withdrawals - 2003/2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 Banknotes denominated in escudos - 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 Banknotes processed by sorting systems - 2003/2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 Unfit rate - 2003/2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 Counterfeit banknotes detected in 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 Developments in circulation - 2003/2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 Status of euro coins issued on 31.12.04 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 Operations processed via SPGT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 Operations processed via SICOI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219 Banco de Portugal | Annual Report | 2004 XXIII Tables Chapter 9 Staff development pattern. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 Age group development pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 Seniority development pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 Retirees and pensioners development pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 Professional training development pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 Financial standing of the Pension Fund as at the end of the year . . . . . . . . . . . . . . . . . . 239 Internal audit activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 Financial Statements Balance sheet of Banco de Portugal - year-end positions . . . . . . . . . . . . . . . . . . . . . . . . . 245 Balance sheet of the Banco de Portugal as at 31 December 2004 . . . . . . . . . . . . . . . . . . . 252 Profit and loss account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254 Note 2: Gold and gold receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 Note 3: Lending and deposit operations with the International Monetary Fund (IMF) 261 Note 4: Balances with banks, security investments and other assets denominated in foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 5: XXIV 262 Balances with banks, security investments and other assets denominated in euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262 Note 8: Tangible and intangible fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 Note 9: Other financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268 Note 10: Off-balance-sheet instrument revaluation differences. . . . . . . . . . . . . . . . . . . . 268 Note 11: Accruals and prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 Note 12: Other assets – Sundry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 Note 19: Accruals and income collected in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 Note 20: Other liabilities – Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 Note 21: Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272 Note 22: Revaluation accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 Note 23: Capital and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274 Note 24: Net interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 Note 25: Realised gains/losses arising from financial operations . . . . . . . . . . . . . . . . . . 276 Note 26: Write-downs on financial assets and positions. . . . . . . . . . . . . . . . . . . . . . . . . . 276 Note 29: Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 Note 30: Staff costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 Banco de Portugal | Annual Report | 2004 Charts CHARTS PARTE I. PORTUGUESE ECONOMY IN 2004 Chapter 1 International environment 1.1 Gross domestic product and world trade of goods and services. . . . . . . . . . . . . . . . . . . 11 1.2 Net flows of foreign direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.3 Trade of goods in volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.4 Cumulative rate of change of the US dollar between early 2002 and end-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1.5 Euro area – gross domestic product and composition of expenditure . . . . . . . . . . . . . . 16 1.6 Total HICP and some administered prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1.7 Gross domestic product in the EU25 countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1.8 Yields on 10-year government bonds and long-term nominal GDP growth expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 (a) Gross issuance of corporate bonds of the non-financial sector of the euro area and the US . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Box 1.1 [1] 19 19 (a) The integration of China in the world economy Weight of China in exports and imports of the major world economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 [2] Trade balance of China with the major world economies . . . . . . . . . . . . . . . . . . . . . . . . 23 [3] Change of market shares in the euro area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Box 1.2 Oil prices: recent developments and economic consequences [1] Brent prices spot market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 [2] Oil consumption per unit of GDP in OECD countries . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 [3] Real brent prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Chapter 2 Economic policies 2.1 Output gap and real interest rates in the euro area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 2.2 Eurosystem projections for inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Eurosystem projections for the real GDP growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 2.3 Long-term inflation expectations in the euro area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 2.4 Contribution of monetary conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Banco de Portugal | Annual Report | 2004 XXV Charts 2.5 Credit standards applied to the approval of loans to non-financial corporations and main determining factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 Credit standards applied to the approval of loans to households for house purchase and main determining factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 2.7 Change in the underlying fiscal position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2.8 GDP per capita in Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 2.9 Market share of Portuguese exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 2.10 Import penetration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 2.11 Effective exchange rate indices for Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2.12 Unit profit margin in the export sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 ( ( Box 2.2 [1] [1] [2] Exchange rate of the euro and price competitiveness of Portuguese exports Effective exchange rate of exports and effective exchange rate index . . . . . . . . . . . . . . Box 2.3 47 Recent developments in the market share of Portuguese exports in the European Union Portuguese exports of goods to the EU15 and imports from the EU15 . . . . . . . . . . . . . 48 Change in the overall share and structure effect in 1997-2000 and 2001-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Box 2.4 50 Human capital as growth factor in the long run [1] Percentage of the age group with complete secondary education . . . . . . . . . . . . . . . . . 51 [2] Total public expenditure on education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Box 2.5 [Diagram 1] [1] Nominal and real wage rigidity: a microeconomic approach Distribution of wage change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Distribution of wage change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 [Diagram 2] The measure of nominal rigidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 [2] Nominal wage rigidity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 [3] Real wage rigidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 [4] Menu costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 [5] Nominal and real wage rigidities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Chapter 3 XXVI 34 Output, expenditure and external accounts 3.1 Gross domestic product. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 3.2 Breakdown of the change in GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 3.3 Quarterly change in GDP and monthly coincident indicator of Banco de Portugal . . . 64 3.4 Domestic transfers to households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 3.5 Portugal– consumer confidence indicator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 3.6 Market share of Portugese exports of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Banco de Portugal | Annual Report | 2004 Charts 3.7 Unit profit margin in the export sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 3.8 Portuguese exports of goods by main countries of destination . . . . . . . . . . . . . . . . . . . . 69 3.9 Imports of goods and services and weighted global demand . . . . . . . . . . . . . . . . . . . . . 69 3.10 Rate of import penetration of goods and services for final use . . . . . . . . . . . . . . . . . . . . 69 3.11 Portuguese imports of goods by main countries of destination . . . . . . . . . . . . . . . . . . . 69 3.12 Investment, savings and borrowing requirements of the economy . . . . . . . . . . . . . . . . 71 3.13 Savings and investment (private sector and general government) . . . . . . . . . . . . . . . . . 71 3.14 Breakdown of the change in the goods account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Box 3.1 (a) (a) Some considerations on the impact of the European Football Championship on the Portuguese economy in 2004 [1] Number of passengers from countries participating in the 2004 European Football Championship (arrivals) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 [2] Travel and tourism account in 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 [3] Harmonised index of consumer prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Chapter 4 Employment and wages 4.1 Private GDP and private employment growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 4.2 Output gap and unemployment rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 4.3 Unemployment rate and changes in real wages in the private sector. . . . . . . . . . . . . . . 78 4.4 Total and long-term unemployment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 4.5 Contributions to total employment growth by sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 4.6 Developments in total unemployment, registered and subsidised . . . . . . . . . . . . . . . . . 83 4.7 Unemployment rate by regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 4.8 Unit labour costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 4.9 Differential between real wage and productivity growth . . . . . . . . . . . . . . . . . . . . . . . . 84 Chapter 5 Prices 5.1 Consumer price index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 5.2 CPI – non-energy industrial goods and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 5.3 Harmonised index of consumer prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 5.4 Unit labour costs in Portugal and in the euro area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Chapter 6 Public finances 6.1 6.2 General government overall balance and change in the underlying fiscal position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Change in cyclically adjusted revenue and primary expenditure . . . . . . . . . . . . . . . . . . 93 Banco de Portugal | Annual Report | 2004 XXVII Charts 6.3 Chapter 7 Breakdown of the change in the general government debt ratio . . . . . . . . . . . . . . . . . . . 99 Breakdown of the deficit-debt adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Financial situation 7.1 Spreads of subordinated securities issued by European banks (denominated in euro) vis-à-vis treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Gross international bond issuance by branches and subsidiaries abroad of Portuguese banking groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 7.3 Portugal 10-year interest rate differential vis-à-vis Germany . . . . . . . . . . . . . . . . . . . . . 106 7.4 Foreign direct investment excluding Madeira and Santa Maria offshores. . . . . . . . . . . 106 7.5 International investment position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 7.6 Stock price indices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 7.7 Stock market capitalization and transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 7.8 Euro yield curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 7.9 Financial transactions of households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 7.10 Indebtedness and interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 7.11 Interest-Bearing financial assets and liabilities of households . . . . . . . . . . . . . . . . . . . . . 112 7.12 Interest receivable and payable by households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 7.13 Financial transactions of non-financial corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 7.14 Total debt of non-financial corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 7.15 Investment fund yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 7.16 Portfolio of mutual funds and money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 7.17 Portfolio of real-estate funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 7.18 Portfolio of pension funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 ( Box 7.1 XXVIII 105 Developments in household wealth since the 1980s [1] Household wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 [2] Composition of household wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 [3] Loans for house purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 [4] Composition of portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 Banco de Portugal | Annual Report | 2004 Charts PART II. REPORT AND FINANCIAL STATEMENT Chapter 8 Activities of the Bank Developments in the value of banknotes put into circulation. . . . . . . . . . . . . . . . . . . . . . . . 207 Developments in the quantity of banknotes put into circulation - 2004 . . . . . . . . . . . . . . . 207 Developments in withdrawals and deposits of banknotes - 2004. . . . . . . . . . . . . . . . . . . . . 208 Developments in total deposits of banknotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 Developments in total withdrawals of banknotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 Developments in the value of metal coins in circulation - 2004 . . . . . . . . . . . . . . . . . . . . . . 213 Breakdown of metal coins in circulation - value 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 Developments in withdrawals and deposits of circulation coins - 2004 . . . . . . . . . . . . . . . 214 Central credit register – Written and personal information – Head-office, Oporto branch and Chapter 9 district agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 Assets and liabilities of the Pension Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239 Financial Statements Banknotes in circulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 Monetary policy and intra-Eurosystem liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247 Exchange rate developments - EUR/USD and euro effective rate . . . . . . . . . . . . . . . . . . . . 247 US dollar interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247 Euro interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247 Investment portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248 Provisions and revaluation differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248 Capital and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248 Interest margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 Total administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 Banco de Portugal | Annual Report | 2004 XXIX Supplementary tables index SUPPLEMENTARY TABLES PART I. PORTUGUESE ECONOMY IN 2004 Chapter 1 International environment A.1.1 World economy – gross domestic product, real rate of change . . . . . . . . . . . . . . . . . . . . 127 A.1.2 World economy – consumer prices, rate of change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 A.1.3 World economy – current account, as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . 129 A.1.4 Advanced economies – unemployment rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 A.1.5 Advanced economies – public finance indicators, as a percentage of GDP . . . . . . . . . . 131 Chapter 2 Economic policies A.2.1 Interest rates of the European central bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 A.2.2 Monetary and financial conditions of the Portuguese economy, averages . . . . . . . . . . 133 A.2.3 Competitiveness and structural indicators, annual rate of change . . . . . . . . . . . . . . . . . 134 Chapter 3 Output, expenditure and external accounts A.3.1 Gross value added by sector of activity, real growth rates. . . . . . . . . . . . . . . . . . . . . . . . 135 A.3.2 Gross domestic product - expenditure side, EUR millions. . . . . . . . . . . . . . . . . . . . . . . . 136 A.3.3 Gross domestic product - expenditure side, real growth rates . . . . . . . . . . . . . . . . . . . . 137 A.3.4 Gross domestic product - expenditure side, change in implicit deflators . . . . . . . . . . . 138 A.3.5 Foreign demand of goods, Portuguese exports and market share, real growth rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 A.3.6 Portuguese exports of goods by main economic categories, nominal growth rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 A.3.7 Portuguese exports of goods by main economic categories, real growth rate . . . . . . . . 141 A.3.8 Portuguese imports of goods by main economic categories nominal growth rate . . . . 142 A.3.9 Portuguese imports of goods by main economic categories, real growth rates. . . . . . . 143 A.3.10 Exports of goods by economic zones and countries of destination . . . . . . . . . . . . . . . . . 144 A.3.11 Imports of goods by economic zones and countries of destination. . . . . . . . . . . . . . . . . 145 A.3.12 Portuguese exports of goods by groups of products, nominal growth rate . . . . . . . . . . 146 A.3.13 Portuguese exports of goods by groups of products, real growth rate . . . . . . . . . . . . . . 147 A.3.14 Portuguese imports of goods by groups of products, nominal growth rate . . . . . . . . . 148 Banco de Portugal | Annual Report | 2004 XXXI Supplementary tables index A.3.15 Portuguese imports of goods by groups of products, real growth rate . . . . . . . . . . . . . 149 A.3.16 Household disposable income, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 A.3.17 Lending/borrowing requirements by institutional sector, EUR millions . . . . . . . . . . . 151 A.3.18 Lending/borrowing requirements by institutional sector, as a percentage of GDP . . . 152 A.3.19 Balance of payments, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 A.3.20 Balance of payments, as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 A.3.21 Transfers with the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Chapter 4 Employment and wages A.4.1 Employment and unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 A.4.2 Labour costs, average rate of change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 Chapter 5 Prices A.5.1 Main price and cost indicators, rates of change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 A.5.2 CPI - Main categories and aggregates, average rate of change . . . . . . . . . . . . . . . . . . . . 159 A.5.3 Portugal and euro area - main HICP aggregates, average rate of change . . . . . . . . . . . 160 Chapter 6 Public finances A.6.1 General government accounts (national accounting), EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 A.6.2 Temporary effects on the general government accounts (national accounting), EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 A.6.3 General government accounts (national accounting), as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 A.6.4 General government accounts (national accounting), percentage change . . . . . . . . . . . 164 A.6.5 General government deficit and change in the debt, EUR millions . . . . . . . . . . . . . . . . 165 Chapter 7 Financial situation A.7.1 Financial account, as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 A.7.2 International investment position EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 A.7.3 International investment position, as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . 170 A.7.4 Net issuance of securities by residents in the external and internal markets by institutional sector, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 A.7.5 Net issuance of securities by residents in the external and internal markets by type of instrument, EUR millions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 A.7.6 Gross issuance of medium- and long-term bonds by residents in the external and internal XXXII markets by type of rate, EUR millions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 A.7.7 Euronext Lisboa: turnover of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 Banco de Portugal | Annual Report | 2004 Supplementary tables index A.7.8 Stock market capitalisation as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 A.7.9 Turnover of bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 A.7.10 Derivatives stock exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 A.7.11 Institutional investors’ portfolio, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 A.7.12 Financial transactions of households, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 A.7.13 Fixed-income financial assets and liabilities of households, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A.7.14 Financial transactions of non-financial corporations, EUR millions . . . . . . . . . . . . . . . . 182 183 A.7.15 Financial assets and liabilities of non-financial corporations, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184 A.7.16 General government financial transactions, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . 185 A.7.17 General government debt by instruments and by holding sectors, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 A.7.18 Financial transactions of the financial sector, EUR millions. . . . . . . . . . . . . . . . . . . . . . . 187 A.7.19 Financial transactions of the sub-sectors of the financial sector, EUR millions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 A.7.20 Financial transactions of the external sector, EUR millions . . . . . . . . . . . . . . . . . . . . . . . 190 Banco de Portugal | Annual Report | 2004 XXXIII Partpelos I. The Portuguese Economy in 2004 Responsáveis Orgãos de Direcção e Delegações Introduction Overview Chapter 1. International Environment Chapter 2. Economic Policies Chapter 3. Output, Expenditure and External Accounts Chapter 4. Employment and Wages Chapter 5. Prices Chapter 6. Public Finances Chapter 7. Financial Situation Supplementary Tables Introductory note Introductory note The Banco de Portugal Annual Report 2004 incorporates a number of changes from the previous issues that are worth noting. The changes introduced regard both the structure and the content of the report and have a twofold objective: on the one hand, it is intended to avoid an excessive overlapping with the Financial Stability Report, which will be published by Banco de Portugal on an annual basis (the first edition was released on 21 June); on the other hand, there is now an explicit concern to look at the annual developments of the Portuguese economy from a more structural perspective; to compare developments in Portugal with those in other economies; and to emphasise the implications of Portuguese participation in the euro area. The structure adopted in the Annual Report 2004 has been simplified vis-à-vis previous editions of the Report. Nonetheless, the Report continues to cover all relevant areas for the analysis of the Portuguese economy. Specifically, the part of the Report dedicated to economic analysis is now organised as follows: Part I. The Portuguese economy in 2004 Overview International environment Economic policies Output, expenditure and external accounts Employment and wages Prices Public finances Financial situation Supplementary tables The first two chapters provide the background for the analysis of the Portuguese econ- Banco de Portugal | Annual Report|2004 omy. The analysis of developments in the international economy, which is the object of Chapter 1 International environment, aims at supplying the elements necessary for understanding the relationships between Portugal and abroad (trade, capital flows, external competition). Chapter 2 Economic policies presents the monetary policy of the European Central Bank and the monetary conditions of the Portuguese economy and provides an overview of the policies that continue to be the responsibility of national authorities, namely the fiscal and structural policies. The latter are now explicitly dealt with in the Report, reflecting their growing importance, particularly in the context of participation in the euro area. Details on the trend of public accounts are provided in Chapter 6 Public finances. Chapter 3 Output, expenditure and external accounts analyses the behaviour of production and expenditure and reviews the trend of the current and capital accounts, whose joint balance reflects the borrowing requirements of the economy. The analysis of the financial account was moved to Chapter 7 Financial situation. Chapter 4 Employment and wages does not present substantial differences from the corresponding section in previous editions of the Report. However, the issues relating to the institutional framework of the labour market are now dealt with in Chapter 2 Economic policies. Chapter 5 Prices presents a detailed analysis of the factors behind price developments. Chapter 6 Public finances, as mentioned above, provides a detailed account of the behaviour of public accounts. 3 Introductory note Chapter 7 Financial situation provides an integrated and more synthetic analysis of a number of issues, which in previous editions of the Annual Report, were covered in the sections on Monetary and financial conditions of the Portuguese economy, Balance of payments (financial account and international investment position), Financial markets, Banking system and Financing of the economy. The analysis is centred on the aggregates for the economy or for the different institutional sectors, in contrast to the Financial Stability Report, where the emphasis laid on the 4 identification of risks implies that the aggregate analysis of the indicators must be supplemented with the analysis of their statistical distribution. Finally, the Annual Report includes a set of Supplementary Tables, organised according to the structure of the Report. These Tables compile information on the relevant variables for the analysis of the Portuguese economy over a longer period (usually 10 years) and with a more detailed breakdown than the information included in the main text of the Report. Banco de Portugal | Annual Report|2004 Overview Overview The Portuguese economy resumed positive growth in 2004, albeit at a moderate pace. The Banco de Portugal estimates point to 1.1 per cent real Gross Domestic Product (GDP) growth, after a fall of similar magnitude in the previous year. The real convergence process of the Portuguese economy had slowed down during the 1990s and came to a halt in 2000. Despite the recovery in 2004, growth rates in Portugal continued to be amongst the lowest in the European Union, and the gap vis-à-vis the average per capita income in Europe grew wider. Growth in 2004 resulted from an expansion of domestic demand, in particular private consumption, in a context of persistently high structural imbalances in public accounts. Exports lost market share whereas imports grew strongly, deepening their penetration in the domestic market. This pattern translated into further indebtedness of the non-financial private sector, especially households, as well as a deterioration of external accounts, which interrupted the adjustment trend seen during the last two years. Activity revealed a marked intra-annual profile, characterised by a strong slowdown in the second half of the year, even though domestic demand - in particular private consumption - remained buoyant in the year as a whole. In 2004, international economic developments were marked by the robust expansion of world trade of goods and services, the recovery of foreign investment flows and a sharp increase in commodity prices, in particular oil. These developments reflect not only the cyclical recovery of the world economy, which started in 2002, but also the structural phenomenon of economic globalization. The latter is Banco de Portugal | Annual Report|2004 reflected in the increasing role of Asia and the new European Union Member States in the world economy. This integration phenomenon means that most countries face fiercer competition, both regarding trade and the attraction of foreign investment. This effect is particularly significant in the Portuguese case, given the specialisation of the economy in the production of low-tech goods. In addition, the rise in oil prices - which partly reflects the significant increase in demand by new players in the world economy - translates into a terms of trade loss, and also accounts for an increase in corporate costs, aggravated by the relatively intensive use of oil in production. The continuing appreciation of the euro and improved conditions in international financial markets, particularly in the euro area, also had a bearing on the Portuguese economy in 2004. In the year as a whole, the effective exchange rate of the euro appreciated by 4 per cent, chiefly reflecting the strengthening of the European currency vis-à-vis the US dollar, the Japanese yen and the Chinese renminbi. In international financial markets, the main stock market indices were up significantly, whereas short- and long-term interest rates remained at low levels, and the yield spreads of private debt vis-à-vis public debt narrowed further. The European Central Bank left the minimum bid rate on the main refinancing operations unchanged at 2.0 per cent, as medium-term prospects remained consistent with price stability and the economic recovery in the euro area faltered in the second half of the year. In spite of the degree of indebtedness in the Portuguese economy, financing conditions improved again in 2004. The average interest rate 5 Overview on loans to non-financial corporations declined by 20 basis points (b.p.) to 4.4 per cent, while the average interest rate on loans for house purchase fell by 50 b.p. to 3.8 per cent. In parallel, since the second half of 2004, there has been an easing in credit standards applied to the approval of loans to enterprises and to households for house purchase. In turn, the capital market moved up significantly, particularly in the equity segment, with the PSI-Geral index rising by almost 30 per cent from the average values in 2003. The general government deficit, on a national accounts basis, stood at 2.9 per cent of GDP in 2004, a value similar to that observed in the previous year. As in 2002 and 2003, maintaining the deficit below the 3 per cent of GDP reference value implied recourse to significant one-off measures. These measures had an effect on the general government balance equivalent to 2.3 per cent of GDP. The debt ratio pursued the upward trend started in 2001, increasing by 1.8 percentage points (p.p.) to 61.8 per cent of GDP at end-2004. Progress in fiscal consolidation was thus limited in 2004, despite the need to correct the large structural imbalances in the public accounts. The slight improvement in the underlying budget position measured by the change in the primary balance adjusted for the cycle and for the effects of temporary measures as a percentage of GDP relied chiefly on increased tax receipts, whereas expenditure on pensions continued to grow unabated. The improved performance of output in 2004 was broadly based. However, while growth in the services sector continued to outpace that of GDP, leading to a further increase of the share of services in total output, manufacturing output was unchanged over the year, after the 1 per cent contraction in 2003. In addition, industrial activity exhibited a clear decelerating trend during the year. The significant deterioration of relative unit labour costs over the past years, which is partly the result of accumulated appreciation of the euro, together with increased international competition and higher commodity and energy prices, appear 6 to be relevant factors in explaining the sluggish manufacturing output. The labour market moved in tandem with the trend in economic activity in 2004. Employment stabilised, with an increase in wage earners being offset by a fall in the number of self-employed. There was again net job creation in the services sector, in clear contrast to contraction elsewhere, reflecting the increasing share of services in the country’s productive structure and the competitive difficulties faced by some industry segments. Job creation capacity in the services sector has helped to rein in unemployment growth. Nonetheless, the unemployment rate increased further in 2004, particularly in the second half of the year, to stand at 6.7 per cent for the year as a whole. Long-term unemployment also increased, and this may be partly connected to the easier move from this type of unemployment into retirement. In spite of the increase in long-term unemployment, real wages rose in 2004, reflecting the joint effect of a fall in the average inflation rate and an acceleration in nominal compensation, specifically in the private sector of the economy. According to Banco de Portugal estimates, nominal compensation per employee in the private sector increased by approximately 3.2 per cent, whereas the figure for the economy as a whole was 2.6 per cent (1). Real wage growth and employment stabilisation, in parallel with the additional improvement in financing conditions, contributed to a rise in confidence in 2004. These factors, combined with the virtual absence of progress in budget consolidation, fostered the expansion of domestic demand. Private consumption in particular grew at a sustained pace during the year, increasing by 2.5 per cent after a slight tail-off in 2003. The recovery in consumption expenditure was particularly marked in the case of durable goods. These are usually more (1) Average compensation per employee, net of personal income taxes and social contributions and adjusted for the effects of the sale of tax arrears. Social contributions considered for the calculation of the compensation per employee in total economy do not include government transfers to the civil servants’ pension scheme (Caixa Geral de Aposentações). Banco de Portugal | Annual Report|2004 Overview sensitive to the business cycle and to financing conditions, and had dropped significantly over the last three years. Household disposable income went up by approximately 1 per cent in real terms in 2004, after a dip in 2003. This came mainly as a result of the acceleration in compensation per employee. Transfers to households continued to provide an important contribution to disposable income, reflecting the significant amount of social contributions from general government, chiefly in the form of pensions. With growth in private consumption exceeding growth in disposable income, the savings rate declined - by approximately 1.5 p.p. -, which translates a change in the behaviour of households vis-à-vis the past two years. The perception that the economic situation would not be as unfavourable as previously expected and that the budget consolidation effort would not be particularly intense is likely to have stimulated private consumption in 2004. In parallel, very low interest rates and new forms of credit contracts, allowing in particular a lengthening of loan maturities, eased liquidity constraints facilitating the expansion of consumption. The improved outlook for demand and favourable financing conditions had a positive effect on corporate investment, in spite of the high level of corporate indebtedness. After very large declines in the two previous years, real growth of total gross fixed capital formation (GFCF) increased by 1.3 per cent in 2004. Most important were the high growth of investment in machinery and metal products and in commercial vehicles. Despite this recovery, the rate of investment in the economy (GFCF/GDP) remained virtually unchanged. Moreover, the recovery in investment came in the first half of the year, and faded away in the second half of the year. The composition of expenditure was characterised by a notable increase in the demand for goods with high import content. This led to a significant expansion of imports, which increased by 7.4 per cent in 2004 after falling slightly in 2003. Import growth remained high throughout the year. In turn, exports of goods and services increased by 5.2 per cent, 0.7 p.p. Banco de Portugal | Annual Report|2004 above the growth in 2003. The significant recovery in exports of services was in contrast to the marked deceleration in exports of goods, which showed significant market share losses, particularly in the second half of the year. The behaviour of trade flows led to a negative contribution of net external demand to GDP growth of 1.1 p.p., after a positive contribution of 1.6 p.p. in 2003. Increased import penetration and losses in export market shares occurred also in other euro area countries. They can be partly attributed to the appreciation of the euro over recent years and to the process of globalisation. In the Portuguese case, however, developments in imports and exports reflect a more general worsening of the competitive position of the economy, visible in the cumulative loss of export market shares recorded since 1997 and in the significant decline in profit margins of Portuguese exporters over the last two years. This is largely related to the cumulative increase in relative labour costs, a trend maintained in 2004. In fact, Portuguese unit labour costs increased 0.7 p.p. more than in the euro area as a whole in 2004, adding to the difficulties in the tradable goods sector. The productive specialisation of Portuguese exports also tends to squeeze market shares, both because low-tech goods suffer from more intense competition from the new players in international markets and because such goods typically benefit from slower demand trend growth. It is important to note, however, that the loss in market share in 2004 was broadly based. All types of products were affected, not just traditional goods. The behaviour of domestic demand and wage costs contributed to the interruption of the downward trend of inflation and to the widening of the goods and services inflation differential. During the year the inflation rate remained relatively unchanged around the levels recorded at the end of 2003. Nonetheless, average inflation, and the corresponding differential vis-à-vis the euro area, declined further in 2004, reflecting the strong deceleration of prices in 2003. The annual average change in the Consumer Price Index (CPI) 7 Overview stood at 2.4 per cent in 2004, after reaching 3.3 per cent in the previous year, whereas the inflation differential vis-à-vis the euro area narrowed from 1.2 to 0.4 p.p. Pressure on goods prices remained contained despite the strong increase in the international oil price. This was because import prices of consumer goods continued to decline and import penetration rose in real terms. Services prices continued to register high growth rates, as services are less likely to be replaced by imports and wage costs are more relevant in this sector. Against this background, the average inflation differential between goods and services widened 0.4 p.p., standing at 2.2 p.p. in 2004. The 2004 growth pattern translated into a significant deterioration of the external accounts. Net external financing requirements of the Portuguese economy, measured by the joint deficit of the current and capital accounts, went up by 2.6 p.p. to 5.9 per cent of GDP. This trend is in contrast to the decline in the external deficit in the previous two years and marks an interruption in the adjustment of macroeconomic imbalances in the Portuguese economy. Considering values adjusted for the effects of the government’s one-off measures, the increase in external financing requirements translates a fall in household and corporate savings, with general government financing requirements remaining virtually unchanged at a high level. The joint deficit on the current and capital accounts was financed by recourse to issues of securities in international markets by resident sectors, by the increase in deposits in Portugal by non-bank non-residents and by the rise in trade credit obtained by non-financial corporations from external suppliers. Financing in the securities market by non-financial corporations and by general government was concentrated on the short-term segment. This was in contrast to the banking system, where there was a continued lengthening of the average maturity of issues in international bond markets and a reduction in net financing in the euro area interbank money market. In 2004, the banking system posted a further improvement in the solvency, liquidity and credit 8 quality indicators. Profitability indicators fell from the previous year, but stood substantially above the trough of 2002, a particularly adverse year for banking activity in continental Europe. It should be noted, however, that the exposure to the real estate sector increased further in 2004, reflecting in particular the continuing strong growth of loans for house purchase. The very favourable conditions prevailing in the international financial markets made it easy to accommodate the higher financing requirements of the Portuguese economy, reducing the incentive for the adjustment of domestic spending. Participation in the euro area allows a significant gap between growth of domestic expenditure and income to persist over a longer period than in the past. The external imbalance is financed in the common currency and is therefore not contained by the possibility of an exchange rate crisis. But the persistence of a substantial gap between the growth of domestic expenditure and income, financed by an increase in external indebtedness, will translate in the need to curb expenditure over time, as a growing stock of debt will have to be serviced. Indeed, the solvency conditions arising from intertemporal budget restrictions faced by individual agents remain as valid as before the adoption of the euro. The Portuguese economy has been flagging in recent years as apparent both in the widening income gap vis-à-vis the European Union and the large and persistent imbalances in the external and public accounts. These developments reflect structural weaknesses that limit productivity growth and hinder the adaptation to increased international competition and to the new economic regime resulting from participation in the euro area. Under current circumstances, resuming a real convergence path implies putting into place a consistent set of reforms aimed at correcting the structural imbalance in the public accounts, facilitating adjustment in the goods and services markets, bolstering the competitive capacity of the economy and fostering potential output growth. Banco de Portugal | Annual Report|2004 Introduction Table 1 PORTUGAL – MAIN ECONOMIC INDICATORS 2002-2004 Units 2002 2003 2004 arc; % arc; % arc; % arc; % arc; % arc; % arc; % arc; % arc; % arc; % arc; % arc; % 3.6 2.4 6.0 3.7 4.4 3.4 0.0 -2.2 3.9 3.9 3.9 3.9 3.3 2.7 4.5 3.3 2.8 3.2 -2.8 -1.9 2.6 1.7 3.3 2.5 2.4 1.6 3.8 2.5 2.4 2.5 0.7 1.8 2.6 3.2 1.6 2.2 Expenditure, income and savings Gross domestic product (GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total domestic demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross fixed capital formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exports of goods and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Imports of goods and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Households’ disposable income (DI) (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Households’ disposable income excluding external transfers(a) . . . . . . . . . . . . . . . . . . . Domestic savings rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private sector(a)(b)(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Households, excluding external transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General government(a)(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . rrc; % rrc; % rrc; % rrc; % rrc; % rrc; % rrc; % rrc; % rrc; % % of GDP % of GDP % of DI % of DI % of GDP % of GDP 0.4 -0.5 1.0 1.7 -5.1 2.4 -0.5 0.6 1.8 18.1 18.4 11.8 8.9 10.2 -0.4 -1.1 -2.5 -0.1 0.3 -9.9 4.5 -0.4 -0.1 0.4 17.8 20.4 11.8 9.3 12.1 -2.6 1.1 2.1 2.5 0.9 1.3 5.2 7.4 1.0 1.0 16.0 18.1 10.4 8.0 10.7 -2.1 III. Employment and unemployment Total employment(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unemployment rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . arc; % arc; % annual average; % 0.4 1.0 5.0 -0.4 -0.3 6.3 0.1 1.2 6.7 IV. Balance of payments (transactions basis) Current account + Capital account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goods account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of GDP % of GDP % of GDP % of GDP -6.0 -7.6 -10.5 1.6 -3.3 -5.4 -9.1 2 -5.9 -7.5 -10.8 1.6 V. Exchange rates(g) Nominal effective exchange rate index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real effective exchange rate Adjusted for the relative unit labour costs(h) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted for the relative consumer price index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . arc; % 0.6 2.6 0.6 arc; % arc; % 2.0 2.0 3.8 3.7 0.9 1.0 %, Dec. %, Dec. 2.9 4.5 2.1 4.4 2.2 3.6 %, Dec. %, Dec. %, Dec. 5.2 5.3 2.9 3.8 4.4 2.0 3.8 4.3 2.0 y-o-yrc; 31-Dec. -20.7 17.4 18.0 I. Prices, wages and unit labour costs Inflation (CPI). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inflation (HICP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GDP deflator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private consumption deflator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goods and services export deflator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goods and services import deflator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nominal compensation per employee, whole economy(a)(c) . . . . . . . . . . . . . . . . . . . . . . . Nominal compensation per employee, private sector(a)(d) . . . . . . . . . . . . . . . . . . . . . . . Unit labour costs, whole economy(a)(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unit labour costs, private sector(a)(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. VI. Interest rates 3-month Euribor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-year fixed rate Treasury bond yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rates on outstanding amounts of credit granted by MFI (i) . . . . . . . . . . . . . . . . . Loans to households for house purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and other credits to non-financial corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits and deposit-like instruments up to 2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII. Stock price index (PSI-Geral) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VIII. Bank deposits and loans to the resident sector(j) Deposits Transferable deposits and other sight liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notice, saving and time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans (k) Non-monetary sector, excluding general government . . . . . . . . . . . . . . . . . . . . . . . . . . Non-monetary financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-financial corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Households. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . y-o-yrc; Dec. y-o-yrc; Dec. 1.7 -1.9 2.0 0.3 0.8 5.0 y-o-yrc; Dec. y-o-yrc; Dec. y-o-yrc; Dec. y-o-yrc; Dec. 10.0 7.6 8.6 11.6 6.2 4.1 2.7 9.6 6.5 13.4 2.5 9.2 Public finance General government overall balance(l) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding temporary measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General government primary balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding temporary measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated gross public debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of GDP % of GDP % of GDP % of GDP Dec., % of GDP -2.7 -4.1 0.3 -1.1 58.5 -2.9 -5.4 0.0 -2.5 60.0 -2.9 -5.2 -0.1 -2.3 61.8 IX. Notes: (a) In 2003 the values are adjusted for the direct effects of the sale of tax credits. (b) In 2003 and 2004 the values are adjusted for the direct effects of the transfers of assets from state-owned enterprises to the general government. (c) Compensation per employee; including wage scale value, additional benefits and Social Security contributions from employers; excluding the government transfers to Caixa Geral de Aposentações. (d) Private sector – economy as a whole excluding general government. (e) Aggregate savings for the economy excluding general government. (f) Data collected from INE’s national accounts for 2002 and 2003 and from INE’s Labour Force Survey for 2004. Data for employees are collected from the Labour Force Survey. (g) A positive change denotes an appreciation in effective terms; a negative change denotes a depreciation. (h) Relative unit labour costs in the whole economy. A positive change denotes an increase in the relative costs of Portuguese producers. (i) Calculate as the average of the interest rates on outstanding amounts of credit granted and deposits taken by MFI, denominated in euro, to/from euro-area residents, broken down by sector and/or purpose, in every maturity, weighted by the respective end-of-month amounts outstanding. Up to December 2003 – estimates. (j) End-of-month balances. (k) Year-on-year rates of change of outstanding amounts, calculated making use of monthly transactions adjusted for securitisations. (l) According to the methodology of the Excessive Deficit Procedure. arc: Average rate of change. rrc: Real rate of change. y-o-yrc:Year-on-year rate of change. Banco de Portugal | Annual Report | 2004 9 Chapter 1 International environment 1 International environment Chart 1.1 Banco de Portugal | Annual Report|2004 GROSS DOMESTIC PRODUCT AND WORLD TRADE OF GOODS AND SERVICES Real rate of change 14 12 8 6 World Trade Period average World trade 10 Per cent In 2004 the world economy grew by 5.1 per cent, the highest rate of the last 25 years. The economic expansion was broadly based across geographical areas, but continued to be led by the United States (US) and Asia. The strengthening of the world output was accompanied by strong global trade growth, a recovery in foreign direct investment flows and a general improvement in financing conditions (Charts 1.1 and 1.2). Despite the significant rise in international commodity prices, inflation in developed economies remained subdued, as available productive capacity, increased competition at international level, and the higher credibility of the monetary authorities have contributed to moderate wage growth. Accommodating macroeconomic policies persisted in several economies, despite official interest rate hikes in the US and United Kingdom. In 2004 world trade of goods and services increased by approximately 10 per cent, i.e. twice the rate recorded in 2003. As far as services are concerned, international tourism, an important activity for the Portuguese economy, recorded the highest growth rate of the last 20 years. However, although the increase was broadly based across regions, Europe recorded the lowest growth rate as a tourism destination - 4 per cent -, reflecting the moderate growth of tourism to Southern, Mediterranean and Western Europe, since tourism to Eastern and Northern Europe was buoyant (Table 1.1). After falling for three consecutive years, global foreign direct investment flows increased by 6 per cent in 2004. This increase was channelled to emerging and developing economies, in particular to Asian economies, since flows to developed economies as a whole declined further. These developments reflect a strong fall in foreign direct investment for the euro area, given that flows to the US and, to a lesser extent to the United Kingdom, recovered significantly. The buoyant world economic growth fuelled strong global demand for commodities, largely contributing to the rise in their prices in Period average GDP 4 GDP 2 0 -2 1980 1984 1988 1992 1996 2000 2004 Source: IMF. Chart 1.2 NET FLOWS OF FOREIGN DIRECT INVESTMENT USD millions 0 200 400 600 800 1000 World Advanced economies EU15 US Emerging and developing economies Asia and the Pacific Latin America Central and Eastern Europe 2002 2003 2004 Source: UNCTAD. 2004. In the year as a whole, non-energy commodity prices increased by approximately 22 per cent, with the sustained rise in iron and steel prices being particularly noteworthy. In the case of oil, demand pressure was amplified by supply-side developments. Political instability in some Middle East countries and in other major oil producing countries raised concerns about world oil supplies, both in the short and medium term. These concerns were aggravated by the limited responsiveness of the production chain. In addition, oil stocks for commercial purposes remained at historical 11 Chapter 1 International environment Table 1.1 DEVELOPMENTS IN INTERNATIONAL TOURISM International tourist arrivals (millions) World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Americas. . . . . . . . . . . . . . . . . . . . . . . . . . . North America . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . Asia and the Pacific . . . . . . . . . . . . . . . . . Middle East . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . Northern Europe . . . . . . . . . . . . . . . . Western Europe . . . . . . . . . . . . . . . . . Central and Eastern Europe . . . . . . . Southern and Mediterranean Europe . . . . . . . . . . . . . . . . . . . . . . . . . Rate of change (per cent) 2002 2003 2004 2002 2003 2004 703 30 117 83 34 131 28 397 46 138 66 691 31 113 77 36 119 29 399 47 136 68 760 33 124 85 39 153 35 414 51 139 73 3 2 -5 -2 -8 9 16 3 4 2 3 -2 3 -3 -7 6 -9 3 0 2 -1 3 10 7 10 10 8 29 20 4 7 2 8 148 148 152 3 0 3 Source: World Tourism Organisation. 12 Chart 1.3 TRADE OF GOODS IN VOLUME 260 Exports from Asian developing countries 240 External demand for Portuguese goods 220 Index 1996=100 minimums in OECD countries, reducing the responsiveness to occasional supply disruptions. In this context, the Brent reached an historical high of 50 USD/barrel at the end of October, and was at year-end around 37 per cent higher than at end-2003. When expressed in euros, the rise in oil prices was less marked, around 26 per cent, reflecting the appreciation of the euro against the US dollar. Developments in world trade, direct investment flows and commodity prices, reflect not only the cyclical recovery of the world economy that started in 2002, but also the strengthening of economic integration at the global level. The latter has translated in an intensive participation of new players in international trade, notably of developing Asian economies, in particular China, and of the countries from Central and Eastern Europe that joined the European Union in May 2004 (Chart 1.3). From the perspective of the Portuguese economy, which is still highly specialised in the production of low-tech goods, these trends translated into increased competition in both export and domestic markets, as well as in increased difficulties in attracting foreign direct investment. In parallel, oil price rises, while in part demand driven, imply a significant rise in corporate costs, with potential adverse effects on future prices and economic activity. In the Portuguese case this is aggravated by the rela- 200 Exports from Central and Eastern Europe(a) 180 160 140 120 Exports from Portugal 100 1996 1997 1998 1999 World trade 2000 2001 2002 2003 2004 Sources: IMF and Banco de Portugal. Note: (a) Countries that joined the EU in May 2004 plus Bulgaria, Romania, Turkey, Albania, Croatia and Macedonia. tively intensive use of oil related products in production. Moreover, oil price rises in the net importing economies translate into a loss of terms of trade, corresponding to a transfer of income to foreign countries. (See “Box 1.1 The integration of China in the world economy” and “Box 2.2 Oil price: recent developments and economic consequences”). In the US, economic activity accelerated, with Gross Domestic Product (GDP) growing at 4.4 per cent, the highest rate of the last 5 Banco de Portugal | Annual Report|2004 Chapter 1 International environment Table1.2 GROSS DOMESTIC PRODUCT AND INFLATION Per cent Weight in world GDP(a) in 2004 Consumer prices(b) Rate of change GDP Rate of change 2002 2003 2004 2002 2003 2004 World economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advanced economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . US . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Euro area(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . New industrialised Asian economies(d) . . . . . . . . . 100.0 54.6 20.9 6.9 15.3 4.3 3.1 2.9 1.7 0.3 3.1 3.5 3.0 1.6 1.9 -0.3 0.9 0.2 1.1 0.4 2.2 0.4 1.8 5.3 4.0 2.0 3.0 1.4 0.5 0.0 0.5 0.4 2.5 -1.1 2.2 3.1 5.1 3.4 4.4 2.6 1.8 1.0 2.4 1.0 2.7 1.1 3.1 5.5 3.4 1.5 1.6 -1.0 2.3 1.3 1.9 2.6 3.6 3.7 1.3 1.0 3.7 1.8 2.3 -0.2 2.1 1.0 2.2 2.8 3.1 3.3 1.4 1.5 3.7 2.0 2.7 0.0 2.1 1.8 2.3 2.3 3.1 2.5 1.3 2.4 Developing and emerging market economies . . . . . . . Developing Asian countries . . . . . . . . . . . . . . . . . . China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ASEAN-4(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Latin America. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Central and Eastern Europe(f) . . . . . . . . . . . . . . . . . 24.6 13.2 5.9 3.5 7.5 2.3 6.5 8.3 4.4 4.6 -0.1 - 8.1 9.3 7.5 5.4 2.2 4.1 8.2 9.5 7.3 5.8 5.7 5.5 2.1 -0.8 4.3 5.7 8.9 - 2.6 1.2 3.8 4.0 10.6 3.7 4.2 3.9 3.8 4.4 6.5 5.2 Memo: Emerging market Asian economies(g) . . . . . . . . . . 28.1 - 7.4 7.8 - 2.4 4.0 Sources: IMF, Eurostat, European Commission and Thomson Financial Datastream. Notes: (a) Based on GDP measured in purchasing power standards. (b) Harmonised Index of Consumer Prices for the euro area and the United Kingdom. (c) Seasonally and working-day adjusted data. (d) South Korea, Hong Kong, Taiwan and Singapore. (e) Indonesia, Malaysia, Philippines and Thailand. (f) Ten countries that joined the EU in May 2004 (Cyprus, Czech Republic, Estonia, Hungary, Lithuania, Latvia, Malta, Poland, Slovenia and Slovak Republic) plus Bulgaria and Romania. (g) Includes developing Asian countries, new industrialised Asian economies and Mongolia. years (Table 1.2). Activity continued to be supported by strong private consumption growth, against a background of accelerating real disposable income - driven by sustained employment growth throughout the year -, a further deterioration of household savings, and the maintenance of favourable financing conditions. Low financing costs and the strong growth of profits led to a significant increase in corporate investment. Despite the cumulative depreciation of the US dollar since 2002 - approximately 15 per cent in nominal effective terms -, the contribution of net external demand to GDP growth was again negative, with the current account deficit reaching an unprecedented level of 5.7 per cent of GDP. The trend Banco de Portugal | Annual Report|2004 depreciation of the US dollar against most major currencies continued to mark developments in international foreign exchange markets in 2004. Investors’ concerns about the upward trend of the external deficit, in a context of historically low household savings and high government deficits, contributed to such developments. Indeed, no fiscal consolidation took place in the US in 2004, since the observed reduction of the general government deficit by 0.3 percentage points (p.p.) of GDP, to 4.3 per cent of GDP, can be fully explained by the cyclical developments of the economy. The depreciation of the US dollar has been particularly marked against the currencies of industrial economies, notably against the euro, since 13 Chapter 1 International environment Chart 1.4 CUMULATIVE RATE OF CHANGE OF THE US DOLLAR BETWEEN EARLY 2002 AND END-2004(a) 25 Per cent 15 5 -5 -15 -25 Singapore dollar (2.1) Malaysian ringgit (2.2) Hong Kong dollar (2.3) Taiwan dollar (2.9) South Korean won (3.9) Pound sterling (5.2) Mexican peso (10.0) Japanese yen (10.6) Renminbi (11.3) Canadian dollar (16.4) Euro (18.8) Nominal effective exchange rate (Broad Index) -35 Source: Federal Reserve. Note: (a) A positive change corresponds to an appreciation of the US dollar. The weights of each currency in the nominal effective exchange rate index are shown in brackets. the central banks of several Asian economies have resorted to significant interventions in the foreign exchange market to prevent or limit the appreciation of their currencies against the US dollar (Chart 1.4). Reflecting the rise in energy prices, annual average inflation in the US, as measured by the change in the consumer price index, increased from 2.3 to 2.7 per cent in 2004 (from 1.5 to 1.8 per cent excluding energy and food prices). The emergence of some pressure on prices in a context of strong economic expansion, led the Federal Reserve to start removing the strong monetary stimulus in place. Thus, beginning in June 2004, the target for the Federal funds rate was raised in successive steps, by a total of 1.25 p.p. until the end of the year (to 2.25 per cent). In Japan, output increased by 2.6 per cent in 2004, the highest rate since 1996. However, growth in the year as a whole chiefly reflects the favourable performance of the economy in the first quarter, since activity virtually stagnated in the following quarters. The strong reduction of public investment in the second 14 quarter, as well as the loss of external stimulus, and the reduction of private consumption in the second half of the year, explain these developments. The general government deficit declined by 0.7 p.p, to 7.1 per cent of GDP, reflecting essentially the impact of the cycle. The public debt ratio continued to show a sharp upward trend, reaching 169 per cent of GDP. In the latter months of 2004 the year-on-year change in consumer prices was slightly positive, largely reflecting temporary effects associated with the strong rise in fresh food prices. Consumer prices recorded a nil change in annual average terms, or a fall of 0.1 per cent excluding fresh food. Amid moderate deflationary pressures and a weakening economic performance throughout the year, the Bank of Japan continued to supply liquidity, to maintain short-term interest rates close to zero. As announced at the end of 2003, this type of policy will be maintained until inflation - as measured by the year-on-year change in the consumer price index excluding fresh food - is nil or slightly positive for some months. In the Asian emerging market economies, economic activity increased by 7.8 per cent in 2004, strongly driven by intra-regional trade, in particular with China. The Chinese economy continued to record a growth rate close to 10 per cent, chiefly reflecting the buoyant performance of exports and investment. Throughout the year, the monetary authorities tried to control the excessive buoyancy of activity and investment in some sectors, for fear of inflationary pressures. The authorities resorted chiefly to administrative measures, although interest rates were also raised slightly in October. The conduct of monetary policy has faced increasing difficulties due to the significant accumulation of reserves related to the policy of exchange rate stability of the renminbi against the US dollar. In 2004 annual inflation rose to 3.9 per cent (1.2 per cent in 2003), but intra-annual data reveal a deceleration of consumer prices in the latter months of the year. In the euro area, which is the main destination of Portuguese exports, the economic recovery, which had started in the second half of 2003, continued at a moderate pace. GDP re- Banco de Portugal | Annual Report|2004 Chapter 1 International environment corded an annual average growth of 1.8 per cent in 2004, after an increase of 0.5 per cent in 2003. The pace of economic expansion decreased in the course of 2004, reflecting a deceleration in exports that was not sufficiently offset by a higher buoyancy of domestic demand. The slowdown of export growth, coupled with buoyant import growth, led to a negative contribution of net external demand to GDP growth in the second half of the year. Domestic demand improved in the year as a whole, reflecting some recovery in Gross Fixed Capital Formation (GFCF), which showed a positive change after falling for three consecutive years. Investment benefited from favourable financing conditions and from the improvement in the financial situation of companies, but continued to be contained by uncertainty regarding demand prospects. Private consumption continued to grow at a weak pace, consistent with the absence of significant improvements in the employment outlook and with the stabilisation of consumer confidence at low levels. Looking at the largest euro area economies, it is worth noting that in France and Spain, where growth was more robust, activity was supported by domestic demand, in particular by private consumption. By contrast, in Italy and, chiefly in Germany, two countries where economic growth stood at 1 per cent, the recovery vis-a-vis 2003 was supported by net exports, with domestic demand remaining weak (Chart 1.5). In these four countries, imports accelerated from 2003, with the highest growth rates seen in Spain and France. Developments in imports of the main countries of destination of Portuguese exports of goods translated into a favourable behaviour of external demand for the Portuguese economy, which increased about 8 per cent in volume (Table 1.3). However, Portuguese exporters have only partially benefited from the expansion of external demand, thus registering significant market share losses (see Chapter 3 Output, expenditure and external accounts). The average rate of change in the Harmonised Index of Consumer Prices (HICP) in the euro area remained unchanged at 2.1 per cent Banco de Portugal | Annual Report|2004 in 2004. The rise in energy prices was broadly offset by a deceleration in the price of unprocessed food. The growth of the HICP excluding the most volatile components recorded a slight increase compared with 2003, reflecting a higher rise in the prices of processed food and services, associated with temporary factors, which include rises in indirect taxes and in administered prices in some euro area economies(1) (Chart 1.6). Despite the less favourable than expected inflation developments and the surge in oil prices, the Governing Council of the European Central Bank (ECB) took the view that, in the context of moderate output growth and high unemployment rates, the risks of emergence of domestic inflationary pressures, namely via increases in wages, remained contained. Against this background, the Governing Council kept the key ECB interest rates unchanged throughout 2004 (see section 1 of Chapter 2 Economic Policies). The fiscal position remained broadly unchanged in the euro area as a whole. Indeed, the general government deficit as a percentage of GDP decreased by 0.1 p.p, to 2.7 per cent in 2004, remaining at 2.4 per cent when adjusted for cyclical effects. However, fiscal positions varied widely across Member States. Half of the countries showed surpluses or deficits clearly below the reference value of 3 per cent of GDP, while the other half recorded fiscal deficits close to, or above, the reference value. Portugal, as well as the three largest economies of the euro area, Germany, France and Italy, belong to this latter group (see Supplementary Table A.1.5). In addition, a number of countries, in particular Portugal, Italy and Belgium, continued to rely heavily on temporary revenues. In the remaining European Union (EU) Member States, economic activity continued to expand at rates far above those of the euro area. In particular, in the United Kingdom, GDP growth increased by 3.1 per cent (2.2 per cent in 2003), driven by domestic demand. Pri(1) It should be noted that in Germany a public health system reform was implemented in January 2004, which translated into an increase in household health care expenses. 15 Chapter 1 International environment Chart 1.5 EURO AREA GROSS DOMESTIC PRODUCT AND COMPOSITION OF EXPENDITURE Year-on-year rate of change Gross domestic product Domestic demand 4 5 France 4 3 3 France Euro area 2 2 Euro area 1 Per cent Per cent Spain 1 Italy 0 Italy -2 Germany -1 2001 IV 2002 IV 2003 IV -3 2001 IV 2004 IV Exports of goods and services 2002 IV 2003 IV 20 Germany 12 16 Euro area Germany 8 Per cent Spain 4 Euro area 12 8 Italy 4 Spain France 0 -4 France Italy -4 -8 -12 2001 IV 2004 IV Imports of goods and services 16 0 Germany -1 0 Per cent Spain -8 2002 IV 2003 IV 2004 IV -12 2001 IV 2002 IV 2003 IV 2004 IV Sources: Thomson Financial Datastream and Eurostat. vate consumption and GFCF accelerated in 2004, in a context of robust wage growth and high corporate profits. The contribution of net exports to GDP growth was more negative than in the previous year, due to the strong acceleration in imports. Annual average inflation, as measured by the HICP stood at 1.3 per cent in 2004 (0.1 p.p. below the figure recorded in 2003). The monetary authorities continued to raise the official interest rates - a move started at the end of 2003 -, by a total of 1 p.p. in the year as a whole, to 4.75 per cent. After a 16 strong deterioration in 2003, the fiscal deficit improved slightly by 0.2 p.p. of GDP (to 3.2 per cent in 2004), reflecting the impact of the business cycle. In the ten new EU Member States, GDP growth was above 5 per cent in 2004, driven by investment, whose high import content translated into a substantial rise in imports. Overall, the contribution of net exports to growth was limited, or negative. The pace of expansion thus continued to vary substantially across EU Member States Banco de Portugal | Annual Report|2004 Chapter 1 International environment Table 1.3 EXTERNAL DEMAND FOR PORTUGUESE GOODS Rate of change in volume, per cent Weights 2003 2002 2003 2004 External demand(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 1.5 3.8 8.2 Intra euro area external demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76.2 1.2 3.5 8.1 23.9 20.1 15.4 3.4 -1.5 3.2 5.2 5.8 -0.2 9.8 7.8 8.1 Extra euro area external demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . US . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.8 2.2 4.6 8.6 11.8 6.5 1.7 3.7 5.5 4.7 7.5 10.8 Sources: INE, European Commission and UK Office for National Statistics. Note: (a) Calculated as weighted average of real growth in imports of goods of the 17 major trading partners. Each individual country was weighted according to its share in Portuguese exports of goods in the previous year. The 17 selected countries are the destination of around 90 per cent of total exports. Chart 1.6 Chart 1.7 TOTAL HICP AND SOME ADMINISTERED PRICES GROSS DOMESTIC PRODUCT IN THE EU25 COUNTRIES Year-on-year rate of change Average real rate of change in 1999-2004 16 5.0 Tobacco 14 4.5 12 4.0 3.5 Medical and paramedical services 8 6 4 2 0 Dez.02 3.0 2.5 HICP (right-hand scale) 2.0 1.5 Hospital services Jun.03 Per cent Per cent 10 Dez.03 Jun.04 1.0 Dez.04 Source: Eurostat. (EU-25), although the dispersion of GDP growth rates narrowed compared with 2003. Portugal again recorded one of the lowest growth rates in 2004, continuing to be one of the worst performers in the EU25 (Chart 1.7). In 2004 developments in international financial markets were particularly favourable to the expansion of economic activity. The cap- Banco de Portugal | Annual Report|2004 Ireland Latvia Estonia Lethuania Luxembourg Greece Hungary Slovenia Slovakia Cyprus Poland Spain Finland Czech Republic Euro area (a) Sweden United Kindom France Belgium Austria Denmark Malta Netherlands Portugal Italy Germany EU25(a) 0 1 2 3 4 Per cent 5 6 7 8 Source: European Commission. Note: (a) Unweighted average of member countries. ital markets of developed economies recorded valuations in the equity and bond segments: the main stock market indices improved and the yields on government bonds declined or remained at very low levels. In parallel, the yield spreads in private debt markets nar- 17 Chapter 1 International environment rowed, which benefited the Portuguese issuers in these markets, in particular banking groups. At the same time, implied volatility in equity and bond markets declined to levels close to the minimums observed since 1997/1998. In the emerging market economies, stock markets also recorded valuations and the yield spreads of sovereign issuers that vis-à-vis US treasury bills dropped to levels close to historical minimums (Table 1.4). These developments reflect the improvement in the financial situation of companies in developed economies, in the context of economic recovery and of the consolidation effort made in the past few years, as well as a growing appetite for risk on the part of investors, which translated in the demand for invest- ments with higher potential returns. The search for yield occurred against a background of accommodative monetary policies over the recent years, in particular in the US and in several Asian economies, which have translated into abundant liquidity at the global level. Indeed, the accumulation of significant external reserves by Asian central banks, and the investment of the bulk of these reserves in US Treasury bills, were a key factor for the maintenance of US long-term interest rates at particularly low levels, both from an historical perspective and regarding long-term US GDP growth expectations (Chart 1.8). US bond prices were also pushed upwards by an increasing demand related to the recycling of revenues from oil producing countries. In ad- Table 1.4 FINANCIAL MARKETS Daily data Average End of period 2002 2003 2004 2002 2003 2004 Stock market indices (change in percentage) S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nasdaq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nikkei 225. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FTSE 100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MSCI Asia (excluding Japan) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dow Jones Euro Stoxx . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PSI-Geral. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17 -24 -16 -17 4 -23 -18 -3 7 -8 -12 1 -18 -7 17 21 20 12 29 18 28 -23 -32 -19 -24 -10 -35 -21 26 50 24 14 43 18 17 9 9 8 8 14 10 18 10-year government bond yields (per cent) United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Euro area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 1.3 4.9 4.9 5.0 4.0 1.0 4.5 4.2 4.2 4.3 1.5 4.9 4.1 4.1 3.8 0.9 4.4 4.3 4.3 4.3 1.4 4.8 4.3 4.4 4.2 1.4 4.5 3.7 3.7 Nominal effective exchange rates (change in percentage) US dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japanese yen. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pound sterling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6 -5.2 0.5 2.9 -6.0 -0.1 -4.8 12.0 -4.6 1.9 4.1 4.0 -2.9 1.8 -2.7 9.7 -8.9 2.2 -3.4 12.2 -4.6 -0.8 1.4 2.1 77 224 21 128 13 73 54 209 14 80 20 58 48 209 40 132 33 84 49 194 31 92 33 72 775 562 437 765 418 356 Differential between the yields on corporate bonds and 7 to 10-year government bonds (in basis points) US. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Euro area AA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Differential between government bond yields issued in US dollars by emerging market economies and US Treasury bonds (in basis points) JP Morgan EMBI + . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sources: ECB, Bank for International Settlements, Bloomberg, Federal Reserve and JP Morgan. 18 Banco de Portugal | Annual Report|2004 Chapter 1 International environment Chart 1.8 Chart 1.9 YIELDS ON 10-YEAR GOVERNMENT BONDS AND LONG-TERM NOMINAL GDP GROWTH EXPECTATIONS(a) 12 12 11 11 Per cent 9 US 10-year bond yields US 10-year GDP growth expectations 8 7 6 5 4 3 120000 10 9 8 7 6 5 Euro area10-year GDP growth expectations Euro area US 100000 USD millions Euro area 10-year bond yields 140000 Per cent 10 GROSS ISSUANCE OF CORPORATE BONDS OF THE NON-FINANCIAL SECTOR OF THE EURO AREA AND THE US(a) 80000 60000 40000 4 3 2 2 Jan.90 Jan.92 Jan.94 Jan.96 Jan.98 Jan.00 Jan.02 Jan.04 Sources: Consensus Forecasts, ECB and Bloomberg. Note: (a) Prospects for long-term nominal GDP growth are calculated as the average of the sum of inflation expectations and real GDP growth from 1 to 10 years ahead. 20000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: Dealogic — Capital Data Bondware. Note: (a) Issuance by nationality of issuer, with a maturity of over 1 year and in all currencies. dition, there was an increase in the demand for long-term bonds by pension funds and insurance corporations in Europe and in the United States, amid regulatory changes that require a better match between the duration of their assets and liabilities. These developments have also contributed to the maintenance of long-term yields in the United States (US) at very low levels, and to a further decline in comparable yields in the euro area and in the United Kingdom. Finally, it should be noted that the strong demand for fixed-yield securities was accompanied by a reduction in new corporate bond issuance in the US and in the euro area. The latter has also contributed to the low levels of long-term interest rates and of the spreads between private and public debt (Chart 1.9). Banco de Portugal | Annual Report|2004 19 Chapter 1 International environment Box 1.1 THE INTEGRATION OF CHINA IN THE WORLD ECONOMY The emergence of the Chinese economy has been a major development for the world economy over the past 25 years. The importance of China has intensified in the recent past and has translated into an increased contribution to world growth, a considerable strengthening of the Chinese weight in international trade flows and the ability of China to attract significant amounts of foreign direct investment. Since the start of the economic reform process at the end of the 1970s, economic growth in China has been remarkable. Between 1980 and 2004, the average GDP growth rate, expressed in purchasing power parities, reached 12.7 per cent, i.e. twice the average world growth over the same period. In the last 15 years, the weight of the Chinese economy in world output doubled, and China is currently the fifth economy at the global level (with GDP measured at of market exchange rates) (Table 1). The fast economic growth of China was supported by structural reforms oriented towards the creation of a more decentralised and market-oriented economy and an increasing openness to international trade. The increased openness of the Chinese economy involved a gradual liberalisation of external trade as well as the creation of conditions for foreign direct investment, and culminated in China’s accession to the World Trade Organisation (WTO) in December 2001. China’s increasing openness to international trade is visible in a set of indicators. In particular, Chinese external trade measured in US dollars recorded average nominal growth of 15 per cent between 1980 and 2004, which compares with an average change of 7 per cent in world trade. The period after China’s accession to the WTO is particularly noteworthy as since then the cumulative growth of both exports and imports expressed in US dollars exceeded 100 per cent. In 2004 China was the world fourth largest exporter and third largest importer. The weight of China’s exports and imports in total world trade reached 6.6 and 6.0 per cent, respectively (Table 2). China’s degree of openness, measured by the ratio of average exports and imports of goods in relation to GDP, increased from 6.3 to 34.9 per cent between 1980 and 2004, and now exceeds by far that of the other major world economies. China became an important export market for the major industrialised economies (Chart 1). This is particularly noticeable in the case of Japan, and of other Asian economies, such as Hong Kong, Taiwan Table1 THE GROWTH OF THE CHINESE ECONOMY Unit 1980 1990 2000 2004 Population. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percentage in world population . . . . . . . . . . . . . Millions Per cent 987 22.1 1143 21.6 1267 20.9 1300 20.6(a) Real GDP (expressed in RMB) . . . . . . . . . . . . . . . 1980=100 100 243 637 887 Weight in world GDP GDP at market exchange rates . . . . . . . . . . GDP expressed in PPP . . . . . . . . . . . . . . . . . Per cent Per cent 2.6 3.2 1.7 5.7 3.4 10.9 4.1 13.2 Real GDP per capita (expressed in RMB) . . . . . 1980=100 100 210 496 674 GDP per capita (United States = 100) At market exchange rates. . . . . . . . . . . . . . . Expressed in PPP. . . . . . . . . . . . . . . . . . . . . . Per cent Per cent 2.5 3.5 1.5 5.8 2.5 11.2 3.2 14.3 Sources: IMF and UN. Note: (a) Refers to 2003. 20 Banco de Portugal | Annual Report|2004 Chapter 1 International environment Table 2 EXTERNAL OPENNESS OF THE CHINESE ECONOMY Unit 1980 1990 2000 2004 Degree of openness (goods) Exports . . . . . . . . . . . . . . . . . . . . . Imports . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP As a percentage of GDP As a percentage of GDP 6.3 6.0 6.6 14.9 16.0 13.8 21.9 23.1 20.8 34.9 35.9 33.9 Share in world trade (goods) Exports . . . . . . . . . . . . . . . . . . . . . Imports . . . . . . . . . . . . . . . . . . . . . . Per cent Per cent 0.9 1.0 1.8 1.5 3.9 3.4 6.6 6.0 1980-89 FDI flows to China(a) . . . . . . . . . . . . . . . Share in world FDI flows Total . . . . . . . . . . . . . . . . . . . . . . . . To emerging market and developing economies . . . . . . . . . 1990-99 2000-04 USD billions As a percentage of GDP 1.6 0.5 29.0 3.9 50.9 3.9 Per cent 1.7 7.2 6.2 Per cent 9.8 25.7 26.7 Sources: IMF, UNCTAD and CEIC. Note: (a) Annual average figures. and Korea(1), for which China has become the main export destination. This partly reflects the increasing degree of vertical integration of the productive process in Asia, where China has emerged as an assembly hub and export platform of finished products. This has caused a considerable expansion of intra-regional trade flows, with China importing increasing volumes of semi-processed goods from other Asian economies and exporting finished products to the rest of the world. Euro area and US sales to the Chinese market have also increased sizeably, although China’s weight in total exports by these economies is less significant. In turn, the penetration of manufactured goods coming from China currently reaches significant levels in the major world economies. The increase in China’s market share reflects the strong comparative advantage of this economy in the production and assembly of goods where labour costs are very important. It should be noted that Chinese exports have been characterised by an increasing diversification (Table 3). For instance, the share of textiles, clothing and footwear in total exports decreased from around 34 per cent in 1994 to around 19 per cent in 2004. By contrast, during the same period, the share of machinery in total exports went up from 16 per cent to more than 40 per cent. China has showed a sustained and relatively stable trade surplus over the past few years, but the geographical structure of trade has developed in line with the changes in the localisation of the productive processes at world level. In this context, China’s trade surplus with the euro area and the US has been increasing, while a deficit has been recorded with the other Asian countries (Chart 2). The Chinese economy has also been gaining increasing importance in the world demand for oil and other commodities, such as iron, steel and copper, adding to the upward pressure on the prices of these commodities in the international markets over the past few years. In particular, the weight of China in the world demand for oil rose from 3.4 per cent to 7.7 per cent between 1990 and 2004. (1) In 2004, the Chinese market represented around 46 per cent of Hong Kong exports and around 20 and 22 per cent of Taiwan and Korea exports, respectively. Banco de Portugal | Annual Report|2004 21 Chapter 1 International environment Chart 1 WEIGHT OF CHINA IN EXPORTS AND IMPORTS OF THE MAJOR WORLD ECONOMIES Weight in exports 1980 1990 25 2004 20 20 15 15 Per cent Per cent 25 Weight in imports 10 5 1980 1990 2004 10 5 0 0 Euro area US Japan Euro area US Japan Sources: European Commission, US Department of Commerce and Japan Tariff Association. Note: No aggregate data are available for the euro area in 1980. Table 3 STRUCTURE OF CHINESE EXPORTS BY GROUPS OF PRODUCTS Share in total nominal exports, per cent Food and live animals; beverages and tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Crude material, inedible, except fuel; mineral fuels, lubricants and material; animal and vegetable oils, fats and wax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chemicals and related products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufactured goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Textile yarn, fabrics and articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and transport equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous manufactured articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Apparel and clothing accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Footwear. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1994 1999 2004 9.1 5.8 3.4 7.1 5.2 19.2 9.8 18.1 41.3 19.6 5.0 0.0 4.5 5.3 17.0 6.7 30.2 37.1 15.4 4.4 0.1 3.4 4.4 17.0 5.6 45.2 26.4 10.4 2.6 0.2 Source: CEIC. In addition to the impact on world trade, the Chinese economy has attracted significant amounts of foreign direct investment since the early 1990s (Table 2). In this period, China received approximately one quarter of the world foreign direct investment channelled to emerging market economies. A significant share of these investments came from Asia. Investment has been chiefly concentrated on the industrial sector, in particular on export-oriented companies. In 2004 companies financed by foreign funds produced more than half of the Chinese exports. The main determinants of foreign direct investment were chiefly associated with two factors: low labour costs - a major determinant in production delocalisation decisions - and the size and growth potential of the Chinese domestic market. The growth of GDP and trade flows in China over the past 25 years is not unprecedented. In other economies comparable growth paces were recorded at similar stages of development(2). However, several factors suggest that the impact of Chinese growth and of China’s integration into the world econ- 22 Banco de Portugal | Annual Report|2004 Chapter 1 International environment omy will be far more significant than that observed in the past for other economies, and TRADE BALANCE OF CHINA should continue to be felt in the forthcoming WITH THE MAJOR WORLD ECONOMIES years. On the one hand, there is the size of China, which claims approximately 20 per cent of the world population. On the other 1994 1999 2004 60 hand, notwithstanding the significant increase recorded in the last 25 years, Chinese GDP per capita, expressed in terms of purchasing power 20 parity, is still far lower than in the major developed economies or in the newly industrialised -20 Asian economies (in 2004 it corresponded to 14.3 per cent of the level observed in the US). This income gap points to a large growth po-60 Total Euro area US Japan Other tential, whose materialisation should be supAsian countries ported by the maintenance of the structural economic reform process. The liberalisation Source: CEIC. under way should continue to contribute to the increasing economic importance and integration of China in the world. For example, the elimination of all textile and clothing import quotas imposed by the WTO on 31 December 2004, is likely to give a further boost to Chinese exports in the forthcoming years and will pose major challenges to the economies specialised in this type of goods. In turn, the commitments undertaken by China relating to the gradual elimination in the coming years of the still-existing restrictions to foreign direct investment - in particular, in the trade and financial sectors - suggest that international investors will continue to be significantly involved in the economy, with positive implications on productivity growth and technological innovation. China’s integration in the world economy has a globally positive impact, in so far as it represents an expansion of the international market, allowing for a bigger specialisation of trade, with efficiency gains in production and direct benefits for consumers, both in China and in the rest of the world. However, individual countries face adjustment costs, which will evolve over time, depending largely on the degree of complementarity between their trade pattern and that of China. In particular, in the short run, countries that are relatively specialised in the export of goods similar to those produced in China, will tend to suffer significant losses if they lack flexible product and labour markets to facilitate the adjustment process. At the firm level, the bigger the product management and innovation capacity and the bigger the adaptability of workers, the smaller the costs. At the aggregate level, an institutional framework facilitating the transfer of capital and labour factors to the more buoyant sectors and companies in the economy, through the closing down of those that have become obsolete, will speed up adjustment and will make it possible to take greater advantage of this integration process. Trade relations between the Portuguese economy and China are negligible. The Chinese market represents less than 0.5 per cent in total Portuguese exports and the share of imports from China in total Portuguese purchases abroad is lower than 1 per cent. However, the emergence of China in the world economy implied a significant increase in competition for Portuguese producers in third markets, whose effect may help explain developments in the market share of Portuguese exports over the past few years(3). It should be noted, for example, that in the euro area market, the market share of USD billions Chart 2 (2) For instance, Japan (after World War II) and the newly industrialised Asian economies (after the end of the 1960s). Banco de Portugal | Annual Report|2004 23 Chapter 1 International environment Chart 3 CHANGE OF MARKET SHARES IN THE EURO AREA 200 Index 1999=100 China virtually doubled between 1999 and 2004 in value terms, while the market share of Portuguese products shrank by approximately 8 per cent over the same period (Chart 3). It should also be noted that the share of goods such as textiles, clothing and footwear in the export structure of Portugal is still rather significant (in 2003 the share of these goods in total exports reached 21.5 per cent, compared with 21 per cent in China). A desegregated analysis shows that the loss of market shares of Portuguese producers in the euro area was particularly marked in the market for this type of goods, where Chinese producers obtained significant market share gains. China - total market share China - market share of textiles, clothing and footwear Portugal - total market share Portugal - market share of textiles, clothing and footwear 150 100 50 1999 2000 2001 2002 2003 2004 Source: Comext. Note: The reference market includes intra and extra euro area imports. The analysis was made with nominal data. (3) For further details on exchange rate developments and the performance of Portuguese export market shares , see “Box 2.2 Euro exchange rate and price-competitiveness of Portuguese exports” and ”Box 2.3 Recent developments in Portuguese export market shares in the European Union”, in Chapter 2 of this Report. 24 Banco de Portugal | Annual Report|2004 Chapter 1 International environment Box 1.2 OIL PRICES: RECENT DEVELOPMENTS AND ECONOMIC CONSEQUENCES USD/barrel In 2004 oil prices grew rapidly and significantly in international markets. Brent crude oil price increased from around 30 USD per barrel in early 2004 to a peak of 50 USD in mid-October, standing around 40 USD at the end of the year (Chart 1). In average annual terms, there was an increase of approximately 33 per cent between 2003 and 2004. In the first months of 2005, oil prices resumed the marked upward trend and Brent crude oil reached a new peak of 57 USD per barrel in early April. The increase in oil prices is partly structural. It reflects a sustained rise in world demand for oil associated with the integration of China and India in the world economy. These countries have a high-energy content of production, partly related to efficiency problems associated with the use of energy. Rising oil prices also reflect the very low levels of investment in capacity by producer countries over the last two decades. Factors of a more temporary nature, such as concerns about supply disruptions, associated with geopolitical tensions, and historically low levels of oil stocks for trading purposes in OECD countries reinforced the structural trends, giving rise to marked speculative activity in the futures market(1). Developments in oil prices in 2004 and the associated uncertainty contributed to the deceleration in economic activity in main industrialised economies in the second half of the year and led to an increase in inflation. The pass-through of the change in oil prices to the economy is complex and takes place through various channels(2). Oil prices have a significant effect on economic activity through the terms of trade, i.e. an increase in oil prices represents a negative shock on the terms of trade of net oil-importer countries. The more rigid the demand for oil, and the higher the energy-intensity of production, the more significant is the loss of the purchasing power in these countries. The weight of oil imports in GDP is frequently used to assess the relative importance of this effect among the different economies and over time. Another pass-through channel of changes in oil prices to the economy is related to the role of oil as an input and to the low substitutability between oil and other energy sources (particularly in the short and Chart 1 medium-term). Therefore, a rise in oil prices imBRENT PRICES plies an increase in firms’ production costs. This SPOT MARKET represents a supply shock that translates into a decrease in potential output. 60 With regard to channels through which oil prices affect inflation, first-round effects are 50 usually distinguished from second-round ef40 fects. First-round effects refer to the direct im30 pact of oil price fluctuations on energy consumer prices (such as fuels) and to the indirect 20 impact on the price of other goods and services 10 via the energy component. Direct effects materialise very quickly and can be observed in the 0 Dec.98 Dec.99 Dec.00 Dez.98 Dez.99 Dez.00 Dec.01 Dez.01 Dec.02 Dez.02 Dec.03 Dez.03 Dec.04 Dez.04 same quarter of the change in oil prices, while indirect effects on inflation occur with some Source: Thomson Financial Datastream. lag(3). Second-round effects add to the previous (1) For more details on the factors underlying the rise in oil prices in 2004 see “Box Recent developments in oil prices” in the Economic Bulletin of Banco de Portugal September 2004. (2) For a detailed description of pass-through channels see Esteves and Neves, (2004)“Oil prices and the economy”, Economic Bulletin of Banco de Portugal, December . Banco de Portugal | Annual Report|2004 25 Chapter 1 International environment effects and are usually associated with the impact of the rise in oil prices on the behaviour of wages. The attempt to reverse the loss in purchasing power associated with first-round effects through wage increases implies a rise in unit labour costs, leading to additional pressure on prices. The occurrence of second-round effects depends mainly on the perception of the degree of persistence of the oil shock, the cyclical position of the economy, the flexibility of the labour market and the credibility and response of monetary authorities. The magnitude of the effects of changes in oil prices on industrialised economies has been declining over time. On the one hand, this reflects a significant decrease in oil consumption per unit of output associated with the use of less oil-intensive technologies and higher recourse to alternative energy sources - and a decline in relative oil prices (Charts 2 and 3). On the other hand, the greater credibility of monetary policy in the stabilisation of inflation and the increase in labour market flexibility associated with globalisation, seem to have limited the occurrence of significant second-round effects. Nevertheless, recent estimates continue to highlight the importance of oil for economic developments in the main industrialised economies. Macroeconomic model simulations indicate that, after two years, a permanent 100 per cent increase in oil prices would have a cumulative effect on GDP growth of -0.8 percentage points (p.p.) in the US and of around -1.5 p.p. in the euro area (Table 1). The results regarding the effects on inflation point to a rise of approximately 1 to 1.5 p.p. in the second year, both in the euro area and the US. Sensitivity to oil shocks is higher in Portugal, both in terms of the cumulative loss in GDP and of the effect on the consumer price index, reflecting a more intensive use of oil. These figures should nevertheless be interpreted with caution. In addition to the usual caveats applying to econometric models - for instance, difficulties in detecting possible non-linearities associated with significant shocks -, the effects of a marked increase in oil prices depend considerably on monetary policy. If monetary policy is oriented towards price stability and benefits from a high degree of credibility, inflation expectations will tend to remain anchored around the monetary authority target, reducing the probability of occurrence of second-round effects. Chart 2 Chart 3 OIL CONSUMPTION PER UNIT OF GDP IN OECD COUNTRIES Deflated by the US CPI REAL BRENT PRICES 350 170 130 110 90 70 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 Source: OECD Index Jan 2001 = 100 Index 1995=100 150 300 250 200 150 100 50 0 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 Source: Thomson Financial Datastream. (3) Given that the weight of energy in household consumption in most industrialised countries is around 10 per cent, and that the response of the energy component of the consumer price index to changes in oil prices tends to be 1 to 10, a 100 per cent rise in oil prices has a direct effect on inflation of around 1 percentage point. 26 Banco de Portugal | Annual Report|2004 Chapter 1 International environment Table 1 EFFECTS OF A 100 PER CENT INCREASE IN OIL PRICES European Commission(a) Euro area International Energy Agency(b) Euro area US Esteves and Neves (2004)(c) Portugal Year 1 Year 2 Year 3 Consumer prices GDP 0.9 -1.2 1.1 -1.5 1.2 -1.6 Consumer prices GDP Consumer prices GDP 0.7 -0.7 0.7 -0.4 1.5 -1.4 1.5 -0.8 - Consumer prices GDP 1.2 -0.8 1.9 -1.5 2.6 -2.2 Notes: (a) European Commission, (2004), Quarterly Report on the Euro Area, vol. 3, 2, 18. Result based on the linear extrapolation of a 25 per cent original shock. (b) International Energy Agency (2004), Energy Prices & Taxes, second quarter, 11-19. Result based on the linear extrapolation of a 40 per cent original shock. (c) Esteves and Neves (2004), “Oil prices and the economy” Economic Bulletin of Banco de Portugal, December. Results based on the macroeconomic model simulation usually used in Banco de Portugal. Banco de Portugal | Annual Report|2004 27 Chapter 2 Economic policies 2 Economic policies Chart 2.1 The monetary policy of the ECB and monetary and financial conditions of the Portuguese economy OUTPUT GAP AND REAL INTEREST RATES IN THE EURO AREA 5 4 Monetary policy of the ECB 5 Long-term interest rate(b) 4 Banco de Portugal | Annual Report|2004 Per cent 3 In 2004 the key European Central Bank (ECB) interest rates remained unchanged from the levels set in June 2003, with the minimum bid rate on the main refinancing operations standing at 2 per cent (Supplementary Table A2.1). This reflected the assessment of the Governing Council of the ECB that, despite the significant impact of oil price increases on actual inflation, and in view of the moderate output growth and high unemployment rates, the risk of emerging domestic inflationary pressures, namely via wage growth, remained limited. The maintenance of the low level of interest rates reflected the concern of the Governing Council of the ECB to continue to support the economic recovery in an environment of continuing negative, relatively stable output gap in the course of 2004 (Chart 2.1). In the first months of the year, forecasts pointed to a decline in the inflation rate to below 2 per cent in 2004 and to the maintenance of levels in line with price stability in 2005. This was based on the assumption of both moderate wage developments and the impact of the past appreciation of the euro on domestic prices. In parallel, the gradual recovery in economic activity in the euro area that started in the second half of 2003 was expected to continue and output growth was likely to reach levels around potential towards late 2004/early 2005. Prospects for robust global economic growth suggested an acceleration in euro area exports, despite the negative impact of the appreciation of the euro on competitiveness. At the same time, the strengthening of domestic demand was expected to continue, as investment would benefit from very favourable financing conditions, and private consumption would be stimulated by the acceleration in real disposable income associated with the reduction in the inflation rate and the gradual improvement in labour 3 2 1 2 Short-term interest rate(b) 0 -1 1 Per cent 2.1 0 (a) -1 -2 -2 98Q4 99Q3 00Q2 01Q1 01Q4 02Q3 03Q2 04Q1 04Q4 Sources: ECB, Consensus Economics and Banco de Portugal calculations. Notes: (a) Potential output calculated with the HodrickPrescott filter. (b) Short-term interest rate deflated by the year-on-year rate of change of the HICP and long term interest rate deflated by 10-year-inflation expectations. market conditions. The assessment of risks surrounding expected developments both to economic activity and inflation was balanced, while some uncertainty persisted related to the correction of global macroeconomic imbalances and their potential repercussions on the sustainability of global economic growth (Chart 2.2). As from the second quarter of 2004 the continued rising trend in oil prices created upward pressure on consumer prices, clearly indicating that inflation would remain above 2 per cent longer than previously expected. Inflation, measured by the year-on-year rate of change in the Harmonised Index of Consumer Prices (HICP), increased from 1.7 per cent in the first quarter of 2004 to 2.3 per cent in the second quarter, remaining around this value in the last two quarters of the year. Although overall prospects have remained in line with price stability over the medium term, oil price developments implied an upward bias in the balance of risks to price stability, given the possible emer- 29 Chapter 2 Economic policies Chart 2.2 Chart 2.3 EUROSYSTEM PROJECTIONS FOR INFLATION LONG-TERM INFLATION EXPECTATIONS IN THE EURO AREA Mid-point of the projection range In Dec 2003 In Sep 2004 2.50 In Jun 2004 In Dec 2004 2.5 Break-even inflation implied in bonds indexed to the HICP (c) 2.25 Per cent 2.0 Per cent 2.00 1.5 Survey of professional forecasters (a) 1.75 1.0 Consensus (b) 0.5 1.50 Jan.99 0.0 Projection for 2004 Mid-point of the projection range In Jun 2004 In Sep 2004 In Dec 2004 Jan.01 Jan.02 Jan.03 Jan.04 Projection for 2005 EUROSYSTEM PROJECTIONS FOR REAL GDP GROWTH In Dec 2003 Jan.00 Sources. ECB, Consensus Economics and Banco de Portugal. Notes: (a) Expectations for inflation 5 years ahead. (b) Average inflation expected over a 10-year horizon. (c) Average inflation expected during the lifetime of the bond (up to 2012). 3.0 2.5 Per cent 2.0 1.5 1.0 0.5 0.0 Projection for 2004 Projection for 2005 Source: ECB. gence of second-round effects stemming from wage and price-setting behaviour. Possible significant increases in indirect taxes and administered prices posed additional upward risks to price stability. The increase in long-term inflation expectations based on financial indicators recommended that particular attention should be paid to the emergence of domestic inflationary pressures (Chart 2.3)(1). In the foreign exchange market, the euro continued to appreciate vis-à-vis the currencies of major trading partners, although recording a 30 more moderate change than in the two previous years. The 4 per cent annual average appreciation of the euro in nominal effective terms (2.1 per cent at end-of-period values) reflected its strengthening vis-à-vis the US dollar, the Japanese yen and the Chinese renminbi - currencies with high weight in the basket used to derive the effective exchange rate. The appreciation of the euro was particularly marked in the last quarter of the year, with the bilateral rate vis-à-vis the US dollar reaching a peak since the creation of the single currency, standing at 1.36 USD/EUR as at end December (Table 2.1). (1) This measure of inflation expectations is derived as the difference between nominal fixed income yields and the real interest rate of index-linked bonds indexed to the euro area HICP (excluding tobacco) issued by the French Treasury. This indicator of inflation expectations should be used with caution, due to several risk premia affecting differently conventional bonds and index-linked bonds, namely liquidity and uncertainty premia relative to inflation developments in the medium and long term. Banco de Portugal | Annual Report|2004 Chapter 2 Economic policies Table 2.1 EURO AREA – EXCHANGE AND INTEREST RATES End of period 2003 I Exchange rates(a) EER-EUR(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (percentage change from the previous quarter) . . . . . . EUR/USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR/GBP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR/JPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR/CNY(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR/CHF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II 2004 III IV 98.2 101.3 101.1 105.8 4.1 3.1 -0.2 4.7 1.09 1.14 1.17 1.26 0.69 0.69 0.70 0.70 129.2 137.3 128.8 135.1 8.96 9.46 9.62 10.40 1.48 1.55 1.54 1.56 Interest rates (in percentage) Overnight (EONIA). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-month Euribor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-month Euribor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-month Euribor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-month Euribor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-3 months (basis points) . . . . . . . . . . . . . . . . . . . . . . . . 10-year interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 2.6 2.5 2.4 2.4 -13 4.1 2.4 2.2 2.2 2.1 2.1 -9 3.9 2.1 2.1 2.1 2.1 2.1 0 4.1 2.3 2.1 2.1 2.2 2.3 19 4.3 I II III IV 102.3 102.5 104.1 108.1 -3.3 0.2 1.5 3.9 1.22 1.22 1.24 1.36 0.67 0.67 0.69 0.71 127.0 132.4 137.2 139.7 10.12 10.00 10.20 11.26 1.56 1.52 1.55 1.54 2.1 2.0 2.0 1.9 2.0 2 4.0 2.1 2.1 2.1 2.2 2.4 31 4.4 2.1 2.1 2.2 2.2 2.4 24 4.1 2.2 2.1 2.2 2.2 2.4 20 3.7 Sources: ECB and Bloomberg. Notes: (a) A positive change denotes an appreciation of the euro. (b) Weights in trade with the euro area: United States (26.19 per cent), United Kingdom (19.18 per cent), Japan (11.45 per cent), China (6.93 per cent) e Switzerland (6.31 per cent). (c) Chinese renminbi . The monetary aggregate M3 continued to grow at high rates in 2004. After having pursued in the first half of the year the moderating trend initiated in mid-2003, monetary growth strengthened further in the second half of the year (Table 2.2). M3 growth stood at 6.4 per cent in December, compared with 5.3 per cent Table 2.2 EURO AREA – MONETARY AND CREDIT AGGREGATES End of period 2003 I 2004 II III IV I II III IV aggregates(a) Monetary M1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency in circulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overnight deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . M2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other short-term deposits (M2-M1) . . . . . . . . . . . . . . . . . . M3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketable instruments (M3-M2). . . . . . . . . . . . . . . . . . . . 11.6 39.4 8.1 8.1 4.8 8.2 9.0 11.3 31.9 8.5 8.4 5.7 8.5 9.2 11.1 27.8 8.7 8.2 5.4 7.6 4.3 10.6 24.9 8.5 7.6 4.7 7.1 4.0 11.4 22.7 9.7 6.7 2.1 6.2 3.1 9.5 21.1 7.7 5.6 1.7 5.3 3.5 9.7 19.9 8.1 6.3 2.7 6.0 4.7 8.4 17.0 6.9 6.5 4.5 6.4 5.8 Credit aggregates Credit to general government(a) . . . . . . . . . . . . . . . . . . . . . . Credit to other euro area residents(a) . . . . . . . . . . . . . . . . . . Loans to other euro area residents(a) . . . . . . . . . . . . . . . . . 1.7 4.8 4.7 3.5 5.1 4.6 5.5 5.4 4.9 6.3 5.8 5.5 6.6 5.7 5.3 7.4 6.1 6.0 5.2 6.3 6.5 2.3 7.0 7.0 Memo: sectoral breakdown of loans Non financial corporations . . . . . . . . . . . . . . . . . . . . . . . . . Households. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lending for house purchase . . . . . . . . . . . . . . . . . . . . . . . 3.7 5.9 3.4 7.6 3.6 5.5 3.4 7.2 3.6 5.8 2.9 7.4 3.5 6.4 2.8 8.1 3.2 6.6 4.3 8.4 4.0 7.3 5.7 9.0 4.5 7.8 6.2 9.8 5.4 7.8 5.8 10.0 Source: ECB. Note: (a) Seasonally-adjusted. Year-on-year rates of change in the last month of the quarter. Banco de Portugal | Annual Report|2004 31 Chapter 2 Economic policies in June. Robust money growth continued to be supported by the low opportunity costs of holding highly liquid assets, as a result of very low levels of nominal interest rates in the euro area. M3 developments in the second half of 2004 were fostered by the behaviour of the remunerated components of the aggregate (notably “other short term deposits” and “marketable instruments”). This was probably associated with the sharp decrease in long-term interest rates in the euro area, which together with fairly stable short term interest rates, translated into a significant flattening of the euro area yield curve. Indeed, in June the spread between ten-year yields and threemonth Euribor had stood at 230 basis points (b.p.), whereas in December it narrowed to 150 b.p. The low level of interest rates led to an acceleration in bank loans to the private sector, with the year-on-year rate of change increasing from 5.3 per cent at the end of the first quarter to 7.0 per cent at the year-end. Growth was particularly buoyant in loans to households for house purchase (the year-on-year growth rate stood at 10 per cent in December vis-à-vis 8.4 per cent at the end of the first quarter of the year), while the growth of loans to non-financial corporations recovered significantly over the year (from 3.2 per cent year on year at the end of the first quarter to 5.4 per cent at the year-end). The improvement in credit conditions offered by banks to households and enterprises contributed to this development, against a background of increased interbank competition(2). (2) See “The results of the January 2005 bank lending survey for the euro area”, ECB Monthly Bulletin, February 2005. Table 2.3 MONETARY AND FINANCIAL CONDITIONS OF THE PORTUGUESE ECONOMY Averages in the period averages 2003 2004 Interest rate (per cent) 3-month Euribor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed rate Treasury bond yields with residual maturity of 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate on outstanding amounts of loans to non-financial corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate on outstanding amounts of loans to households for house purchase. . . . . . . . . . . . . . . . . . . . . . . . Interest rate on outstanding amounts of loans to households for consumption and other purposes . . . . . . . . Stock market PSI-Geral index (percentage change from the previous corresponding period) . . . . . . . . . . . . . . . . . . . . . . . . . Exchange rate Nominal effective exchange rate index (percentage change from the previous corresponding period)(a) . . . . . . . . . . . . . . . EUR/USD exchange rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percentage change from the previous corresponding period(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Memo: Year-on-year rate of change of the CPI . . . . . . . . . . . . . . . . . . 2003 2004 I II III IV I II III IV 2.3 2.1 2.7 2.4 2.1 2.1 2.1 2.1 2.1 2.2 4.2 4.1 4.1 4.0 4.2 4.4 4.1 4.4 4.2 3.8 4.6 4.4 5.0 4.7 4.4 4.3 4.4 4.4 4.3 4.3 4.3 3.8 4.8 4.4 4.0 3.9 3.8 3.8 3.8 3.8 7.9 7.8 8.1 7.9 7.8 7.8 7.9 7.8 7.7 7.7 -7.0 27.5 0.1 2.3 4.2 8.5 13.0 4.0 -1.2 4.8 2.6 1.13 0.6 1.24 1.1 1.07 0.9 1.14 0.0 1.12 0.3 1.19 0.4 1.25 -0.5 1.20 0.1 1.22 0.6 1.30 19.7 9.9 7.4 6.0 -1.1 5.7 5.1 -3.6 1.4 6.2 3.3 2.4 4.0 3.6 2.9 2.6 2.2 2.5 2.4 2.4 Source: Banco de Portugal. Note: (a) A positive change denotes an appreciation of the index. Calculations made against a group 13 trading partners up to 1999; from 1999 onwards, calculations were made against a group of 22 trading partners. For a detailed description of the methodology, see Gouveia and Coimbra (2004), “New effective exchange rate for the Portugese economy”, Economic Bulletin, Banco de Portugal, December. (b) A positive change denotes an appreciation of the euro. 32 Banco de Portugal | Annual Report|2004 Chapter 2 Economic policies Chart 2.4 CONTRIBUTION OF MONETARY CONDITIONS GDP growth rate Inflation rate 1.5 2.0 1.5 0.5 Percentage points Percentage points 1.0 0.0 -0.5 -1.0 1.0 0.5 0.0 -0.5 -1.0 -1.5 1999 2000 2001 2002 2003 2004 -1.5 1999 2000 2001 2002 2003 2004 Effects of the interest rate changes occurred during the three years before the reference period. Effects of the exchange rate changes occurred during the three years before the reference period. Source: Banco de Portugal. Monetary and financial conditions of the Portuguese economy Monetary and financial conditions of the Portuguese economy in 2004 were supportive of the expansion of economic activity. In particular, short and long-term interest rates remained at very low levels, both in nominal and real terms, alongside a valuation in the stock market (Table 2.3). Estimates based on a monetary conditions index(3) for the Portuguese economy suggest that the low levels of money market interest rates observed in the past few years had a positive impact on output growth in 2004, partly offset by developments in the effective exchange rate index for Portugal. This indicator also suggests a significant contribution of monetary conditions to the reduction in inflation in 2004 due to the appreciation of the exchange (3) For further information on this index, see Esteves, P. (2003) “Monetary conditions index for Portugal”, Economic Bulletin, Banco de Portugal, June. Banco de Portugal | Annual Report|2004 rate. In view of the relatively modest appreciation of the euro and broadly stable short-term money market interest rates in 2004, these estimates largely reflect the lagged effects of the appreciation of the euro exchange rate and of the decline in interest rates in 2002 and 2003 (Chart 2.4). Bank lending rates in Portugal are predominantly variable and indexed to money market interest rates. Therefore, in the course of 2004 the interest rates on bank loans to the non financial private sector remained at levels close to those observed at the end of the previous year, reflecting the stability of short-term money market interest rates. However, in terms of annual average values, the interest rate on loans to non-financial corporations declined 20 b.p. in 2004 (to 4.4 per cent) and the interest rate on the stock of loans for house purchase fell by 50 b.p. (to 3.8 per cent). The margins implicit in the rates applying to the outstanding amounts of bank loans to non-financial corporations remained at levels similar to those seen in the previous year, but declined somewhat in the case of loans for house pur- 33 CREDIT STANDARDS APPLIED TO THE APPROVAL OF LOANS TO HOUSEHOLDS FOR HOUSE PURCHASE AND MAIN DETERMINING FACTORS General assessment Competition (b) Q3:2004 Q1:2004 Q3:2003 Q1:2003 Q4:2004 Q2:2004 Q4:2003 Q2:2003 -2 Q4:2002 1 Q3:2004 Competition (b) Expectations Activity/firm regarding specific outlook general (b) economic activity (b) -1 Q1:2004 Capital cost (b) 2 Q3:2003 General assessment 0 Q1:2003 -2 3 Q4:2004 1 1 Q2:2004 -1 4 Q4:2003 2 2 Q2:2003 0 5 Q4:2002 3 Q4:2002 Q2:2003 Q4:2003 Q2:2004 Q4:2004 1 Q1:2003 Q3:2003 Q1:2004 Q3:2004 4 Q4:2002 Q2:2003 Q4:2003 Q2:2004 Q4:2004 2 Q1:2003 Q3:2003 Q1:2004 Q3:2004 5 Factors contributing to supply conditions [deviation from neutral value (3)] CREDIT STANDARDS APPLIED TO THE APPROVAL OF LOANS TO NON-FINANCIAL CORPORATIONS AND MAIN DETERMINING FACTORS General assessment (a) Chart 2.6 Factors contributing to supply conditions [deviation from neutral value (3)] Chart 2.5 Q4:2002 Q2:2003 Q4:2003 Q2:2004 Q4:2004 General assessment (a) Chapter 2 Economic policies Expectations Expectations regarding general regarding economic activity housing market (b) (b) Source: Banco de Portugal. Notes: (a) Average of the responses given by the five major Portugese banking groups in the Bank Lending Survey for the euro area. Values below 3 represent a tightening from the previous quarter, whereas values above 3 represent an easing of credit standards. (b) Right-hand scale. Source: Banco de Portugal. Notes: (a) Average of the responses given by the five major Portugese banking groups in the Bank Lending Survey for the euro area. Values below 3 represent a tightening from the previous quarter, whereas values above 3 represent an easing of credit standards. (b) Right-hand scale. chase. At the same time, according to data reported by Portuguese banks in the context of the euro area bank lending survey, banks eased credit standards for the approval of loans to enterprises and to households for house purchase as from the second half of 2004(4). As in the euro area, this was mainly due to increased competition among banks (Charts 2.5 and 2.6). In line with developments in the euro area, government bond yields declined markedly in the second half of the year. By year-end ten-year yields on Portuguese Treasury bonds stood below 4 per cent. The Portuguese stock market followed the upward trend initiated in the second half of 2003, against a background of continuing low levels of volatility. The PSI Geral index showed an average increase of 27.5 per cent in 2004, compared with a valuation of 18 per cent in the Dow Jones Euro Stoxx index for the euro area. (4) The detailed results of the different surveys are available on the Banco de Portugal’s website (www.bportugal.pt). 34 2.2 Fiscal policy The general government deficit reached 2.9 per cent of Gross Domestic product (GDP) in 2004, a figure similar to that recorded in the previous year. In order to keep the deficit below the 3 per cent of GDP reference value, it was necessary, as in 2002 and 2003, to resort to a wide range of one-off measures, which had an impact on the general government balance equivalent to 2.3 per cent of GDP. The government debt ratio continued the upward path initiated in 2001, standing at 61.8 per cent at the year-end. The primary balance adjusted for the cycle and the impact of one-off measures, an indicator commonly used to measure fiscal consolidation, improved by around 0.2 percentage points (p.p.) of GDP from 2003. Overall, the slightly restrictive policy implemented Banco de Portugal | Annual Report|2004 Chapter 2 Economic policies Chart 2.7 CHANGE IN THE UNDERLYING FISCAL POSITION Change in the underlying fiscal position (p.p. of GDP)(a) Overall balance excluding temporary measures (percentage of GDP) Per cent or percentage points 2 0.9 1 0.2 0 -1 -2 -0.1 -0.9 -0.8 -0.9 -1.0 1998 1999 2000 2001 -3 -4 -5 -6 2002 2003 2004 Sources: INE, Ministério das Finanças and Banco de Portugal. Note: (a) Banco de Portugal estimates for the cyclical adjustment using the HP filter with l=30. as from 2002 permitted the correction of only one quarter of the imbalance accumulated in the period from the decision to participate in Stage Three of Economic and Monetary Union to 2001 (Chart 2.7). In 2004 the deficit adjusted for the cycle and the impact of temporary measures remained above 4 per cent of GDP. This has made it impossible to keep the deficit below the 3 per cent of GDP reference value, except by resorting repeatedly to one-off measures. The structural deterioration of the fiscal position in the second half of the 1990s was associated with strong growth in primary current expenditure. At an early stage, this has not translated into a deterioration of fiscal deficits, as the nominal convergence process of the Portuguese economy and the consequent decline in the implicit interest rate of the public debt permitted a reduction of more than 5 p.p. in the ratio of interest expenditure to GDP from 1992 to 1999. However, the stabilisation of interest rates after the adoption of the euro limited the reduction in interest payments, which ceased to offset strong growth in primary current expenditure. Indeed, the fact that the savings in interest expenditure were used to accommo- Banco de Portugal | Annual Report|2004 date the impact of discretionary measures and structural trends, notably in the pension systems, led to a buoyant growth in primary current expenditure that has proven very difficult to control. Unfavourable developments in the fiscal position have been contained in the past three years. But the consolidation effort was not sufficient and the strategy adopted was only partly based on measures with lasting effects on the narrowing of the deficit. On the one hand, recourse to extraordinary and one-off measures was significant. On the other hand, the strategy to cut the deficit did not change the behaviour of primary current expenditure in a lasting way. In the period from 1998 to 2004, primary current expenditure increased by 8.2 per cent in average annual terms, compared with average nominal GDP growth of 5.5 per cent. The main contributors to growth in primary current expenditure were transfers to households and compensation of employees, which as a whole account for 6.7 of 8.2 percentage point average growth. These contributions result both from the weight of these expenditure components, representing as a whole around 80 per cent of primary current expenditure, and from high average growth rates in the period under review (10.1 and 6.8 per cent in transfers to households and compensation of employees respectively) (Table 2.4). Therefore, permanent consolidation necessarily implies cutting growth in these expenditure components in order to make it compatible with developments in tax revenue stemming from economic growth. Possible increases in taxation or in the collection of taxes for the provision of services, per se, will not have permanent effects on the narrowing of the deficit, as expenditure dynamics will lead to the erosion of the positive effects on the revenue side. The postponement of fiscal consolidation prevents a lasting recovery in the convergence of Portuguese per capita income to the European Union average levels. Indeed, the correction of structural imbalances in public accounts, although denting growth in the short run, will create favourable conditions to sustained economic growth over the medium and 35 Chapter 2 Economic policies Table 2.4 STRUCTURE AND GROWTH OF GENERAL GOVERNMENT CURRENT EXPENDITURE 1998-2004 average Structure (as a percentage of primary current expenditure) Primary current expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . Current transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . to households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . to corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation of employees . . . . . . . . . . . . . . . . . . . . Intermediate consumption . . . . . . . . . . . . . . . . . . . . . 100.0 49.9 39.7 3.9 6.3 39.3 10.8 Growth rate (per cent) 8.2 9.9 10.1 9.8 8.7 6.8 5.0 Contribution to the growth rate of primary current expenditure (in p.p.) 8.2 4.9 4.0 0.4 0.6 2.7 0.5 Sources: INE and Ministério das Finanças. long term. The correction of structural imbalances in public accounts is also relevant for compliance with the requirements of the Stability and Growth Pact (SGP). The recent reform of the SGP kept the 3 per cent and 60 per cent of GDP reference values unchanged for the fiscal deficit and the public debt respectively; clarified the elements to take into account in the assessment of the fiscal position in case of deficits that are temporary and close to the reference value; defined annual adjustments of 0.5 per cent of GDP and extended the time period for the correction of excessive deficits (see “Box 2.1 The reform of the Stability and Growth Pact”). Such changes do not substantially modify the serious challenges faced by Portuguese fiscal policy. 2.3 Competitiveness and structural policies In the years following accession to the European Community, Portugal experienced a fast catching-up of the income per capita levels vis-à-vis the other Member States. However, the catching-up process slowed down during the 1990s and was interrupted from 2000 onwards (Chart 2.8). In 2004 the Portuguese economy grew again below the European average, while at the same time external accounts deteriorated, interrupting the correction observed in the previous two years. The disappointing performance of the Portuguese economy in the 36 past few years reflects a number of structural weaknesses, which limit productivity growth and hamper both the adjustment to the new macroeconomic regime resulting from participation in the euro area and the response to strengthened foreign competition. The recovery in 2004 was supported by the expansion of private domestic demand, in a context of continuing structural public account imbalances. Exports experienced losses of share in international markets(5), while imports grew strongly, which was reflected in a significant increase in the respective rate of penetration in the domestic market(6) (Charts 2.9 and 2.10). This type of development in trade flows occurred also in other euro area countries and was partly related to the appreciation of the euro in recent years, as well as to the increased participation of new players in international trade. However, in the Portuguese case, the performance of exports and imports should be (5) The change in market shares is computed as the real growth of goods exports versus the real growth of foreign demand. An increase means a gain of market share of Portuguese exporters. Foreign demand is measured as the weighted average of the real growth rate of imports of the 17 major trade partners. These countries account for approximately 90 per cent of exports. (6) Measured as the difference between the growth rate of imports and the growth rate of domestic demand. An increase denotes a gain of market share by foreign producers. Banco de Portugal | Annual Report|2004 Chapter 2 Economic policies Chart 2.8 Chart 2.9 GDP PER CAPITA IN PORTUGAL(a) MARKET SHARE OF PORTUGUESE EXPORTS PPS Cumulative growth Volume 75 160 70 150 Index 1985=100 Index EU15=100 Value 170 65 60 140 130 120 110 100 55 90 80 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 50 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Sources: INE, European Commission, UK Office for National Statistics and Banco de Portugal. Source: European Commission. Note: (a) Break in series in 1991 (from 1991 onwards, it includes reunified Germany). Banco de Portugal | Annual Report|2004 Cumulative growth Volume 260 Value 240 220 Index 1985 = 100 seen in the context of a trend deterioration of the competitive position of the economy. The latter reflects the ability of firms to compete in external and domestic markets, as well the ability to attract foreign direct investment, a key factor for an economy in a catching-up process. Since 1997 the cumulative market share loss of Portuguese exports of goods exceeded 12 per cent in volume, being even higher in value terms. This behaviour reflects both the real exchange rate appreciation - largely due to stronger cumulative growth in unit labour costs in Portugal - and the pattern of specialisation of Portuguese exports. These factors have been particularly adverse in a context of strengthened globalization. The real effective exchange rate index based on unit labour costs in manufacturing increased by 2.7 per cent in 2004, which translates into a cumulative growth of 16.3 per cent since 1997. Real growth as measured by the effective exchange rate index based on prices of goods and services exports was substantially lower - around 1.3 per cent since 1997 (Chart 2.11). Differing developments in the real exchange rate indicators assessed on the basis of labour costs in manufacturing and on the basis of export prices point to a reduction in profits Chart 2.10 IMPORT PENETRATION 200 180 160 140 120 100 80 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Sources: INE and Banco de Portugal. of exporting firms. Indeed, the unit profit margin in the export sector deteriorated, most notably in the past two years (Chart 2.12). Lower profit margins in exports may induce the closing up and delocalisation of firms in the manufacturing sector, with negative consequences for export growth. It is important to note that the real exchange rate indicators probably underestimate the deterioration in price/cost competitiveness over the most recent period, as they do not cover exchange rate developments in countries that are not a relevant desti- 37 Chapter 2 Economic policies Chart 2.11 Chart 2.12 EFFECTIVE EXCHANGE RATE INDICES FOR PORTUGAL(a) UNIT PROFIT MARGIN IN THE EXPORT SECTOR(a) Accumulated growth Relative unit labour costs - total economy Relative unit labour costs - manufacturing Relative consumer price index Relative export prices - goods and services 155 300 145 250 135 Index 1985=100 Index 1985=100 165 125 115 105 95 200 150 100 50 85 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Sources: INE, European Commission, Eurostat, OECD and Banco de Portugal. Note: (a) Costs/prices vis-à-vis 13 major trading partners until 1999 and vis-à-vis 22 major partners from 1999 onwards, both adjusted for exchange rate changes. A positive change denotes an increase in relative costs/prices of Portuguese exporters. nation for Portuguese exports, but are direct competitors in third markets (see “Box 2.2 Exchange rate of the euro and price competitiveness of Portuguese exports”). The specialisation by products of Portuguese exports shows a very significant weight of the so called traditional products. These goods are subject to increased competition by the new players in international markets and usually benefit from weaker trend growth in demand, adversely affecting the behaviour of market shares (see “Box 2.3 Recent developments in the market share of Portuguese exports in the European Union”). The competitiveness difficulties of the Portuguese economy are also reflected in the behaviour of net flows of foreign direct investment, which have shown a negative change of 0.6 per cent of GDP in annual average terms since 1997. Developments in the competitive position of the Portuguese economy and the emergence of important macroeconomic imbalances in the last years of the 1990s were in contrast to the 38 Unit profit margin Unit labour costs in manufacturing Import prices of intermediate goods Price of goods exports 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Sources: INE and Banco de Portugal. Note: (a) The unit profit margin is calculated as the percentage change of the ratio of the price of goods exports to a measure of aggregate cost. An increase denotes a rise in the profit margin of Portuguese exporters. The aggregate cost measure is computed as the weighted average growth of both intermediate goods import prices and unit labour costs. In the calculation, each component is weighted according to the import and wage content in exports, according to the 1999 inputoutput matrix. situation observed in the years that followed accession to the European Community. In that period, average growth in Portugal stood clearly above that observed in the other Member States, the real exchange rate appreciated significantly and the share in export markets recorded important gains. The major factors behind this were trade gains arising from trade liberalisation with European Community countries, a favourable international environment associated with a period of low oil prices and the effects of some structural reforms such as the start of the privatisation process and financial liberalisation. During this period, developments in the effective exchange rate were deemed to be largely in line with the equilibrium path and therefore did not translate into a deterioration of the external position of the economy. Banco de Portugal | Annual Report|2004 Chapter 2 Economic policies In the late 1990s, external accounts worsened significantly, reflecting both domestic and external factors. On the domestic side, the unwinding of the effects of positive shocks mentioned above was not offset by structural improvements linked to the endowment of productive factors in the economy, namely with regard to the low levels of human capital and capital intensity. In addition, the marked decline in interest rates associated with the prospective participation in the euro area triggered a fall in the savings rate and strong growth in private expenditure, aggravated by a pro-cyclical stance of fiscal policy. On the external side, the Asian crisis in the late 1990s led to a very significant depreciation of the currencies of countries that compete with Portuguese exports in third markets, notably in low tech sectors. In addition, the gradual transformation of central and eastern European countries into market economies with high levels of human capital, low wage costs and a geographical location close to large European consumer markets translated into a strong attraction of foreign direct investment flows and the creation in those countries of export capacity in intermediate technology-intensive sectors. Participation in the euro area makes it possible to maintain a significant gap between growth in domestic expenditure and income over a longer period of time than in the past. Indeed, the resulting external imbalance is financed in the single currency and is therefore not subject to the possible emergence of an exchange rate crisis. However, solvency conditions resulting from the inter-temporal budget constraints of individual agents continue to be relevant. Hence, an adjustment will have to occur and may imply significant costs. The relaunching of the real convergence process and the correction of macroeconomic imbalances prevailing in the Portuguese economy require the strengthening of competitiveness, which necessarily implies the implementation of a combined range of reforms to correct the structural imbalance of public accounts, favour potential output growth and facilitate the adjustment of goods and services markets. Organisations such as the OECD and the Euro- Banco de Portugal / 2004 Annual Report pean Commission conduct regularly international comparative analyses, providing some indications regarding priority areas for intervention in this field(7). These analyses show the unfavourable position of Portugal concerning, inter alia, human and physical capital accumulation, investment in research and development, institutional framework and quality of public expenditure. With regard to the functioning of the labour market, the analyses reveal the co-existence of elements of rigidity that hamper growth and some elements of flexibility. The average level of human capital is recognised as one of the main factors behind economic growth. In this field, the situation of the Portuguese economy is very unfavourable, resulting from slow recovery from historical delay. The low labour productivity vis-à-vis the European Union (EU) average is therefore not surprising (see “Box 2.4 Human capital as growth factor in the long run”). The low level of labour productivity is also the result of low physical capital per employee in the Portuguese economy, estimated to reach less than half the average of OECD countries. Lower interest rates in the context of the nominal convergence process of the Portuguese economy and the subsequent participation in monetary union did not substantially change this situation. Investment in research and development and associated innovation activities can also bring about important benefits in terms of increased productivity. In Portugal, investment in knowledge-related areas stands well below that observed in most OECD countries. In particular, investment in research and development as a percentage of GDP is less than half the EU average and around one third of the OECD average. Such a gap can also be seen in the number of researchers per 1000 employees. In addition, two thirds of research and development activities in Portugal are implemented in government or academic agencies, while in (7) See, for example, OECD (2005), “Economic Policy Reforms - Going for Growth” or European Commission (2005), “Report from the Commission to the Spring European Council”. 39 Chapter 2 Economic policies the OECD this figure is below 30 per cent. This difference is partly due to the type of production specialisation in Portugal, which, in relative terms, is less oriented to technologyintensive goods. Regulation — i.e., state intervention on market decisions, competition, entry and exit of firms and bureaucracy - also has a significant impact on economic growth. Regulation aimed at facilitating the entry and exit of firms leads to increased market competition, and thereby to higher productivity and investment. On the other hand, excessively complex regulatory procedures and the need to interact with different general government structures - the so called bureaucracy - impose costs on companies that have a negative impact on their performance. Also in these areas, Portugal has scope for further improvements, with positive consequences on productivity levels. According to an OECD overall assessment, Portugal is among the group of countries with intermediate position, showing clear progress in terms of reducing state intervention in the economy, but still above the EU average(8) . Finally, as mentioned in the previous section, the Portuguese economy posts excessive growth in public expenditure, which implies persistent fiscal imbalances and a deviation of private sector resources. The causes behind excess expenditure vis-à-vis the quantity and quality of goods and public services provided in Portugal are numerous, but the inadequacy of incentives faced by agents taking an active part in expenditure decisions and in the actual supply of services seems to play a key role(9). As regards the functioning of the labour market, both the level of participation and flexibility are important. The labour market participation rate in Portugal is above the EU average. Nevertheless, the prevailing demographic (8) OECD (2005), Structural Policy Indicators and Priorities in OECD countries, “Economic Policy Reforms - Going for Growth”. Assessment based on indicators for product market adjustment, state market intervention, barriers to the establishment of companies and barriers to international trade and investment. (9) OECD (2003), OECD Economic Surveys, Portugal, “The effectiveness of Public Expenditure in Portugal”. 40 trends impose the need to move in line with reforms adopted in some countries with a view to extending working life. This poses further challenges to the Portuguese economy, characterised by low average productivity and education levels, mainly in higher age groups. In terms of flexibility, dismissal costs play a pivotal role in the adjustment of labour demand to product demand shocks. The strong barriers to factor mobility tend to create distortions in the allocation of resources, to hinder the matching of employees to jobs and to amplify zones of inaction in the functioning of markets. In this context, the reduced intensity of flows in the Portuguese labour market is particularly relevant and corresponds to around one third of what is recorded in the US and half of that observed in Spain(10). However, reference should also be made to some elements of flexibility in the functioning of the Portuguese labour market, reflected in the potential for job creation, particularly in the services sector, which has partly offset the contraction in manufacturing employment (see Chapter 4 Employment and wages). In this regard, it is important to stress the difference between the private and public sectors. Employment in the latter tends to be excessive and is characterised by low flexibility. In terms of the potential for real wage adjustments, despite some past episodes of marked flexibility, recent microeconomic evidence points to some rigidity (see “Box 2.5 Nominal and real wage rigidity: a microeconomic approach”). In a low-inflation regime, wage rigidity may constrain the reaction of firms to negative shocks, leading them to reduce employment instead of wages. In addition, there is some evidence at he macro level that past adjustments in real wages may have been closely linked to the historical behaviour of the nominal exchange rate via non-anticipated shocks to inflation(11). (10) Blanchard, O. and P. Portugal (2001) “What hides behind an unemployment rate? Comparing Portuguese and U.S. unemployment,” American Economic Review 91 (1) 187-207. (11) See Dias, F. et al (2004), “Revisiting the NAIRU estimates for the Portuguese Economy”, Economic Bulletin of Banco de Portugal, June. Banco de Portugal | Annual Report|2004 Chapter 2 Economic policies Main structural measures in 2004 In 2004 there were some structural changes in Portugal that are worth mentioning. As from January 2004 the sale of fuels was liberalised, ceasing to be subject to price ceilings (Executive Order 1423-F/2003 of 31 December 2003). The sale price of fuels will likely reflect changes in oil prices, i.e., the price system will also signal the relative shortage of this commodity. In addition, conditions were created for an increase in competition in this sector. In any case, given the oligopolistic structure of the market, the need to ensure competition and to eliminate some barriers to entry persists. As regards the removal of barriers to entry in product markets, two major changes occurred in 2004. On 4 February 2004, the regime allowing the privatisation of notaries was promulgated, intended to reduce costs for users and to increase the efficiency of these services. Subsequently, in March 2004, a new regime governing retail licences was promulgated simplifying the requirements to obtain new store permits, which should contribute to foster competition in retail trade. Finally, Decree-Law 380/93 was revoked. This piece of legislation had been approved in the context of the privatisation framework law and provided for the possibility of limiting foreign participation in the capital of privatised companies. Within the scope of the labour market, the Labour Code was regulated on 29 July 2004 (Law 99/2003 of 27 August). This Code brings together the legislation in force in this area and defines as its purpose to increase the adaptabil- Banco de Portugal | Annual Report|2004 ity in the labour market via an increase in the flexibility of contracts. The practical effects of the entry into force of the Labour Code cannot yet be fully assessed. However, there was a substantial decline in the number of employees covered by collective bargaining in 2004. In the tax policy domain, Decree-Law 287/2003 of 12 November introduced new taxation regulations applicable to real estate. Essentially, the municipal tax on real estate replaces the former local tax, introduces changes in the calculation of the property value liable to taxes and establishes lower rates. The Municipal Transfer Tax, which replaces the Property Transfer Tax incorporates the new regime for the evaluation of real estate and, simultaneously, defines a new tax structure. The guiding principle behind this reform is based on a decline in marginal tax rates, which reduces the distortions in the market, while tax revenue is ensured by an increase in the tax base, translated into a narrowing of the difference between the property value liable to taxes and the actual market value, and into lower tax evasion. The gift and inheritance tax was eliminated, and transfers due to decease or to donation in favour of beneficiaries other than husband or wife, descendants or ascendants will be subject to 10 per cent Stamp Tax duties. Finally, regarding changes with lasting effects on public expenditure growth in 2004, reference should be made to the entry into force of the new retirement regulations in the public sector, which penalise early retirement before 60 years and consider wages net of social contributions, instead of gross wages, to calculate the new pensions. 41 Chapter 2 Economic policies BOX 2.1 THE REFORM OF THE STABILITY AND GROWTH PACT An articulate set of fiscal rules and procedures has been regarded as an essential requirement for the smooth functioning of monetary union. Indeed, the conduct of inappropriate national fiscal policies may have negative spillovers on the other Member States, usually with a bearing on the level of long-term interest rates. In addition, the common monetary policy reinforced the stabilisation role of fiscal policies at the domestic level. In this vein, the European Union (EU) Treaty establishes a number of restrictions to the financing of the public sector, sets up mechanisms for the surveillance of domestic policies and imposes on the Member States the obligation to avoid excessive government deficits (Articles 99 and 101 to 104). The fiscal framework established in the Treaty was complemented by the Stability and Growth Pact (SGP)(1), which clarifies and defines the steps for the implementation of the excessive deficit procedure and establishes the presentation and assessment of Stability and Growth Programmes to be updated by Member States on an annual basis. In addition, within the scope of the SGP, Member States are committed to attaining a budgetary position close to balance or in surplus in the medium term. Compliance with the provisions laid down in the European fiscal framework aims at safeguarding the sustainability of public accounts, offering Member States the necessary room for the operation of automatic stabilizers over the business cycle, and to address fiscal pressures due, notably, to demographic developments. In practice, however, the fiscal position in a number of Member States deteriorated in recent years, there has been ample recourse to temporary measures and considerable statistical revisions have taken place. In parallel, the non-approval by the Ecofin Council, in November 2003, of the Commission recommendation under Article 104(9) of the Treaty on the fiscal situation in Germany and France highlighted a deadlock in the decision-making process. These developments justified the need for a reform of the SGP, started by the European Commission with a set of guidelines presented in the report “Public Finances in EMU - 2004" and developed in the Communication on ”Strengthening economic governance and clarifying the implementation of the Stability and Growth Pact" of 3 September 2004. This led to the approval by the Ecofin Council (and subsequent agreement by the Heads of State or Government) of the document “Improvements in the implementation of the stability and growth pact” on 20 March 2005, which will guide the changes to be introduced in the SGP regulations. According to this document, there are chiefly three areas within the framework of fiscal surveillance that should be subject to changes, involving, inter alia, strengthening the economic governance, improving the SGP “preventive arm” and adjusting some aspects related to the implementation of the excessive deficit procedure (“corrective arm”). As regards economic governance, the document refers to the need for cooperation and communication between the Council, the Commission and the Member States in the implementation of the SGP, refining the support and pressure system among peers and ensuring complementarity between domestic and EU fiscal rules. In addition, the update of national stability programmes should reveal continuity in terms of budgetary objectives, consider a horizon corresponding to the legislative periods, and explain the means and instruments for compliance with the objectives. These documents should be discussed by national parliaments and be based on realistic macroeconomic scenarios. Any possible difference vis-à-vis the Commission’s economic forecasts should be explained in detail. Finally, improvements are expected in the quality, reliability and availability of data on public finances to be reported by Member States to the EU authorities. (1) The SGP was established in Resolution of the European Council of 17 June 1997 (97/C 236/01) and in Council Regulations (EC) No 1466/97 and No 1467/97 of 7 July 1997. 42 Banco de Portugal | Annual Report|2004 Chapter 2 Economic policies Turning to the improvement of the so-called SGP’s “preventive arm”, the medium-term objective for the fiscal balance defined in the Pact as “close to balance or in surplus” should be different among Member States, taking into account their particular situation. The objective will be defined in terms of the fiscal balance adjusted for the cycle and for temporary measures, and may change from 1 per cent of Gross Domestic Product (GDP), in countries with low public debt ratios and/or high potential GDP growth rates, to a position close to balance or in surplus, in countries with high debt ratios and/or low potential GDP growth rates. Moreover, implicit liabilities, chiefly related to the increase in expenditure resulting from population ageing, should be taken into account in the definition of the objective, after a common methodology has been established. In countries that have not yet reached their medium-term objective, an increase of 0.5 per cent of GDP in the fiscal balance adjusted for the cycle and for temporary measures should be taken as a benchmark. This adjustment should be higher in “favourable periods”, defined as periods when the output gap is positive, but could be more limited in “unfavourable periods”. Furthermore, only the reforms with direct effects on expenditure restraint and on the increase in potential growth should be taken into account to justify deviations from the medium-term objective, but should nonetheless be accompanied by detailed cost-benefit analyses. With regard to adjustments in the implementation of the excessive deficit procedure (“corrective arm”), the document approved by the Ecofin Council mentions that the 3 per cent and 60 per cent reference values for the fiscal deficit and public debt ratios to GDP laid down in the Treaty continue to provide an anchor for the assessment of the fiscal position of Member States, but that the “exceptional” circumstances envisaged in Article 104(2) and defined in the SGP need to be reviewed. A deficit above the reference value may be considered exceptional in cases in which the real GDP growth rate is negative. Therefore, the 2 per cent fall to make the possibility of breaching the reference value automatic and the 0.75 per cent fall to make the breaching eligible to be considered under exceptional circumstances will no longer be required. In addition, when the deficit temporarily exceeds 3 per cent of GDP, but stays close to that value, the Council decision regarding the existence of an excessive deficit situation will take into account “relevant factors”, such as fiscal costs due to the introduction of funded pension systems, research and development policies and net financial contributions to the Community budget. These factors, however, will not be taken into account in the decisions to revoke an excessive deficit situation. Finally, the document points to a widening of the time-limit for decisions to be taken by the Council, as well as of the period granted to Member States for the correction of the excessive deficit situation under special circumstances related to the evaluation of the budget situation and explained in the Commission report. Although maintaining the major aspects unchanged, the SGP reform introduces some flexibility in the EU framework for fiscal surveillance, aiming to ensure an analysis more based on the economic reality of the Member States and statistically more accurate. Nonetheless, such analysis may involve a higher degree of discretion in the decision-making process. The smooth functioning of the proposed system will chiefly depend on the manner in which it is actually implemented and, in particular, on the commitment of the different actors involved in the pursuit of policies consistent with a sustainable fiscal situation. Banco de Portugal | Annual Report|2004 43 Chapter 2 Economic policies Box 2.2 EXCHANGE RATE OF THE EURO AND PRICE COMPETITIVENESS OF PORTUGUESE EXPORTS Portuguese exports have suffered from increasing competition from third countries in the European market, related with the recent accession of central and eastern European countries to the European Union and with the increased openness of some Asian economies, particularly China. This growing integration makes the Portuguese economy more vulnerable to the fluctuations of the euro exchange rate than implied in the effective exchange rates that are usually built to analyse price competitiveness. The reason why the effective exchange rate indices usually computed tend to underestimate the effect of fluctuations in the euro exchange rate on the price competitiveness of exports relates to the manner in which third country competition is measured in each export market. The construction of an effective exchange rate index generally uses the so-called double-weighting system, so that the weight of each country in the index reflects not only its importance as a market of destination of exports, but also competition from that country’s exporters in third markets. However, competition in third markets is frequently limited to the group of countries selected according to their importance in the exports of the country for which an effective exchange rate index is being built. For instance, Portuguese producers compete with Spanish producers not only in the Spanish market (bilateral competition), but also in other markets to which both Portugal and Spain export (third market competition). The weight allocated to Spain in the effective exchange rate indices usually computed reflects its relative importance as Portugal’s competitor in those two locations. There are other countries, however, that, although not representing a relevant market of destination of Portuguese exports (for instance China), are important competitors in major Portuguese export markets. Therefore, those countries should integrate the group of competitors considered in the effective exchange rate. In addition, the selection of countries to be included in the calculation of the effective exchange rate should take into account the different specialisation of the economies. The fact that a given country exports to an important market of destination for Portuguese exports does not necessarily make it a direct competitor, since that depends on whether or not the nature of the sales to that market is a substitute for Portuguese exports. For illustrative purposes, an alternative effective exchange rate index was constructed to evaluate price competitiveness of Portuguese exports. The data used cover total exports of goods to a group of 245 countries in 2003. A double weighting system was used, taking into account the effects of third country competition in the markets of destination of Portuguese exports(1). In addition to the 17 countries initially selected as major markets for Portuguese exports, a wider group of countries was considered, whose weight on the competitiveness indicator does not reflect the importance of the respective markets in Portuguese exports, but only their competition in markets that are relevant for Portugal. The countries considered for the final selection were those whose weight exceeded 0.2 per cent, implying a selection of 40 countries, covering approximately 95 per cent of total weights initially estimated. This double weighting procedure was carried out separately for each of the six major products in the structure of Portuguese exports of goods, according to the Harmonised Commodity Description and Coding System considered by World Trade Atlas. These elementary products represented approximately 50 per cent of exports in 2003, and may be aggregated in four large groups: machinery (19.8 per cent of total exports), transport equipment (14.2 per cent), clothing (10.5 per cent) and footwear (5.1 (1) An intuitive explanation of this double weighting system is given in Turner, P. and J. Van’t dack (1993), “Measuring international price and cost competitiveness”, BIS Economic Papers, nº 39, November. 44 Banco de Portugal | Annual Report|2004 Chapter 2 Economic policies per cent)(2). The final result was obtained by the aggregation of sectoral indices, in line with the weight of each of those products in total Portuguese exports. Table 1 reports the weights obtained for each country selected, as well as the weights used to compute the effective exchange rate index presently published by Banco de Portugal. This comparison Table 1 WEIGHTS OBTAINED FOR THE EFFECTIVE EXCHANGE RATE OF EXPORTS AND EFFECTIVE EXCHANGE RATE INDEX FOR PORTUGAL Per cent Effective exchange rate of exports Euro Area . . . . . . . . . Germany . . . . . . . . . Spain . . . . . . . . . . . . France . . . . . . . . . . . Italy . . . . . . . . . . . . . The Netherlands . . Belgium . . . . . . . . . . Austria. . . . . . . . . . . Ireland . . . . . . . . . . . Finland . . . . . . . . . . Greece . . . . . . . . . . . EU (extra-euro) . . . . Sweden . . . . . . . . . . Poland . . . . . . . . . . . Denmark . . . . . . . . . Hungary . . . . . . . . . Czech Republic . . . Slovakia. . . . . . . . . . Other Europe . . . . . Turkey . . . . . . . . . . . Switzerland . . . . . . Romania . . . . . . . . . Norway . . . . . . . . . . North America . . . . . US. . . . . . . . . . . . . . . Canada . . . . . . . . . . Latin America . . . . . Mexico . . . . . . . . . . . Brazil . . . . . . . . . . . . Asia . . . . . . . . . . . . . . China . . . . . . . . . . . . Singapore . . . . . . . . Japan . . . . . . . . . . . . Vietnam. . . . . . . . . . South Korea . . . . . . India. . . . . . . . . . . . . Bangladesh . . . . . . . Hong Kong . . . . . . . Indonesia . . . . . . . . Taiwan. . . . . . . . . . . Thailand . . . . . . . . . Malaysia . . . . . . . . . Philipines . . . . . . . . Africa . . . . . . . . . . . . . Morocco . . . . . . . . . Tunisia. . . . . . . . . . . 57.8% 16.6% 13.2% 11.1% 7.7% 3.6% 3.5% 1.0% 0.5% 0.3% 0.2% 13.6% 1.2% 1.1% 0.9% 0.7% 0.7% 0.4% 3.9% 1.8% 1.2% 0.7% 0.2% 6.0% 5.5% 0.4% 0.7% 0.4% 0.2% 16.7% 5.8% 2.2% 2.1% 1.1% 0.9% 0.8% 0.7% 0.6% 0.6% 0.6% 0.6% 0.5% 0.3% 1.4% 0.9% 0.5% Effective exchange rate index(a) 75.7% 17.9% 23.5% 12.1% 8.6% 5.4% 4.7% 1.5% 1.1% 0.8% 0.2% 12.0% 1.4% 1.1% 0.8% 0.8% 0.6% 2.5% 1.9% 0.6% 6.3% 6.3% 0.7% 0.7% 2.8% 2.8% 0.0% - Source: World Trade Atlas. Note: (a) This index is the result of using average weighting factors of imports and exports of manufactures for the 2001-2003 period and considers 22 trading partners. For a methodological description see Gouveia, A. and C. Coimbra (2004), “New effective exchange rate index for the Portuguese economy”, Economic Bulletin of the Banco de Portugal, December . (2) These aggregates are the result of the following aggregation of elementary two-digit items of the Harmonised Commodity Description and Coding System: machinery = 84+85; transport equipment =87; clothing = 61+62; footwear =64. Banco de Portugal | Annual Report|2004 45 Chapter 2 Economic policies shows that the exercise carried out leads to a significant decrease in the weight of the euro area (of almost 20 percentage points (p.p.)), which, while broadly based across countries, is particularly striking in the case of Spain (of approximately 10 p.p.). This decline is offset by an increase in the weight of the other European economies (of almost 5 p.p.), and especially of the Asian economies (of almost 15 p.p.). This is the result of the growing penetration of new countries into European markets. Considering the six major destinations of Portuguese exports within the euro area, the export share of Asian economies (excluding Japan) attains 12.5 per cent, whereas in the 10 new Member States, it stands at 5 per cent. However, if one considers only the most relevant sectors for Portuguese exports, the market share of those economies is substantially higher, reflecting a product specialisation that is rather close to that of Portugal (Table 2)(3). Table 2 MARKET SHARE IN MAJOR MARKETS FOR PORTUGUESE EXPORTS (a) Per cent Total Machinery Transport equipment Clothing Footwear Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EU15. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New EU Member States . . . . . . . . . . . . . . . . . . . . Asia (excl. Japan) . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 59.5 5.0 12.5 23.1 100.0 53.8 7.4 19.3 19.5 100.0 78.4 7.5 3.9 10.2 100.0 32.7 6.5 40.0 20.7 100.0 44.7 4.6 33.0 17.6 Memo item:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 0.9 1.4 3.2 5.8 Source: World Trade Atlas. Note: (a) Spain, Germany, France, Italy, Belgium and The Netherlands. The fall in the weight of the euro area translates into an increased sensitiveness of the price competitiveness indicator of Portuguese exports vis-à-vis the fluctuations of the euro exchange rate. In particular, given the peg of some Asian currencies to the US dollar, the results obtained indicate that the fluctuations of the US currency tend to have a stronger effect on the price competitiveness of Portuguese exports than suggested by the weight of the US as an export market. This is illustrated in Chart 1, and is particularly evident in the period after 2001, when the exchange rate of the euro appreciated. The accumulated appreciation up to 2004 implied in the index published by Banco de Portugal (4.2 and 9.2 per cent in nominal and real terms (CPI), respectively) is significantly lower than that obtained in the exercise carried out (11.7 and 14.5 per cent). This difference is less marked in the period before 2001, since the higher sensitivity of the competitiveness indicator to the depreciation of the exchange rate of the euro vis-à-vis major international currencies seems to have been partly offset by the strong depreciation in the currencies of some countries considered here, in the wake of the exchange rate crises occurred during the period. (3) An exception to this is related to exports of cars due to the fact that Asian economies (excluding Japan) do not show specialisation in that sector. 46 Banco de Portugal | Annual Report|2004 Chapter 2 Economic policies Chart 1 EFFECTIVE EXCHANGE RATE OF EXPORTS AND EFFECTIVE EXCHANGE RATE INDEX Real (CPI) 120 120 115 115 110 Index 2000=100 Index 2000=100 Nominal Effective exchange rate of exports 105 100 Effective exchange rate index for Portugal 110 Effective exchange rate of exports 105 Effective exchange rate index for Portugal 100 95 95 90 90 1998 2000 2002 2004 1998 2000 2002 2004 Sources: INE, IMF and Banco de Portugal. Banco de Portugal | Annual Report|2004 47 Chapter 2 Economic policies Box 2.3 RECENT DEVELOPMENTS IN THE MARKET SHARE OF PORTUGUESE EXPORTS IN THE EUROPEAN UNION Per cent The accession of Portugal to the European Economic Community in 1986 and the subsequent participation in the European Single Market boosted the growth of Portuguese exports of goods. From 1986 to 1996, the strong buoyancy of Portuguese exports translated into nominal market share gains exceeding 45 per cent in cumulative terms. After 1997, however, Portuguese exporters recorded significant market share losses. From 2001 onwards, this situation changed slightly, with some gains in market share, albeit clearly insufficient to offset previous losses, and in 2004 there were further significant losses. The unfavourable developments in Portuguese export market shares in recent years seem to have been chiefly due to the increased competition from third countries, against the background of a deteriorating competitive position, although the pattern of specialisation in production also had a negative influence on the aggregate behaviour of exports. From 1997 to 2004, nominal growth in Portuguese exports to the European Union Chart 1 (EU15)(1) was much lower than that of EU15 PORTUGUESE EXPORTS OF GOODS TO THE imports, which translated into a loss in ComEU15 AND IMPORTS FROM THE EU15 munity market share that reached more than 13 Rates of change, in nominal terms per cent in cumulative terms (Chart 1 and Table Portuguese exports to the EU15 1). Applying a constant market share methodolImports from EU15 Total share ogy(2), this overall loss in the Portuguese export 25 share over the last eight years was broken down 20 into a “market share effect” and a “structure ef15 fect”. The structure effect examines how the 10 composition of Portuguese exports by product 5 has affected the development of the overall share, 0 whereas the market share effect considers effec-5 tive changes in the share of each product in the -10 Community market. The results obtained indi-15 cate that the most significant contribution to the 1997 1998 1999 2000 2001 2002 2003 2004 unfavourable behaviour of market shares in Sources: Comext and Banco de Portugal. 1997-2004 came from the market share effect, Note: which explains about 9 percentage points (p.p.) (a) Total excluding fuels and other residual prodof the total market share loss. Such a negative ucts. market share effect suggests a substantial deterioration of the competitiveness of Portuguese exports in the Community market. The composition of exports by product - the so-called structure effect has also contributed in an important way to the significant loss in overall share, accounting for around 30 per cent of the total loss. This effect is associated with the higher relative weight in Portuguese exports of products whose demand grew below the average in the last eight years. At the sector level, Portuguese exports of “apparel and clothing accessories” had a particularly unfavourable performance. This category of exports has suffered significant effective market share losses and does not represent a favourable specialisation due to the lower relative growth of demand for this (1) In this period, approximately 80 per cent of Portuguese exports were targeted at other Member States of UE15. (2) For a more detailed description of the methodology used, but applied to volume data, see Cabral, S. (2004), “Recent evolution of Portuguese export market shares in European Union”, Economic Bulletin, Banco de Portugal, December. 48 Banco de Portugal | Annual Report|2004 Chapter 2 Economic policies type of products. The same applies, albeit to a lesser degree, to Portuguese exports of “footwear”. The contribution of “transport material” to the overall performance of export market shares was also negative, since advantage was not fully taken of the growth potential offered by Portuguese specialisation in these products, whose demand increased above the average. Exports of “machinery” also saw effective losses in share in this period. In addition, the non-specialisation on these products that have benefited Table 1 PORTUGUESE EXPORTS TO THE EU15 AND IMPORTS FROM THE EU15 BY MAIN GROUPS OF PRODUCTS (NOMINAL) 1997-2004 period Exports Imports Exports Imports from from from from Portugal EU15 Portugal EU15 to EU15 to EU15 Average rates of Average weights change SITC, rev.3 Total excluding fuels and other residual products . . . . . . . . . . . . . 4.8 6.5 100 100 Total effect Market Structure share effect effect Accumulated effects -13.5 -9.1 -4.4 Contributions in p.p. SITC 0 SITC 1 SITC 24+ 25 SITC 21 to 23 + 26 to 29 SITC 4 SITC 5 SITC 61+ 65 SITC 63+ 64 SITC 62 + 66 to 69 SITC 70 to 77 SITC 78 + 79 SITC 84 SITC 85 SITC 81 to 83 + 87 to 89 Food and live animals . . . . . . . . . Beverages and tobacco . . . . . . . . . Raw material — Wood, cork and paper . . . . . . . . . . . . . . . . . . . . Other raw material, excluding food and fuels . . . . . . . . . . . . . . . . Animal and vegetable oils, fats and waxes. . . . . . . . . . . . . . . . . . . . Chemical and related products, n.e.s.. . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of hides— fur skins and leather . . . . . . . . . . . . . . . . . . . Manufacture of wood, cork and paper . . . . . . . . . . . . . . . . . . . . . . . . Other manufactures, classified by raw material . . . . . . . . . . . . . . . Machinery . . . . . . . . . . . . . . . . . . . Transport material . . . . . . . . . . . . Apparel and clothing accessories Footwear. . . . . . . . . . . . . . . . . . . . . Miscellaneous manufactures. . . . 9.1 4.6 3.9 6.2 4.3 2.3 7.8 1.3 2.8 -0.3 1.7 -0.3 1.1 0.0 3.4 4.2 2.7 1.0 -0.6 -0.2 -0.4 9.6 3.4 1.4 2.8 1.1 0.6 0.5 -2.6 4.3 0.2 0.4 -0.1 -0.1 0.1 10.8 8.9 5.3 12.7 -0.7 0.7 -1.4 1.3 1.2 6.4 2.6 -1.5 0.1 -1.6 5.2 1.2 6.3 2.7 0.4 2.0 -1.5 10.3 6.2 4.0 -0.4 -0.3 5.0 7.3 9.0 5.6 5.8 9.8 17.7 17.5 13.8 7.0 10.6 28.5 15.1 3.9 1.0 4.3 -2.3 -6.5 -8.2 -3.9 4.1 -1.6 -7.2 -7.3 -3.5 0.2 -0.7 0.7 -0.9 -0.4 11.1 6.5 5.3 9.5 2.1 2.1 0.0 Sources: Comext and Banco de Portugal. Note: (a) Figures may not add up due to rounding. from a strong upward trend in demand translated into a negative structure effect. In contrast, exports of “chemicals and related products” showed some effective gains in share in this period, although Portugal has not attained a sufficient degree of specialisation in these products with particularly buoyant demand. Chart 2 shows that in the last four years taken as a whole the share of Portuguese exports in the Community market recovered somewhat, despite the negative trend observed in 2004. In fact, the total cumulative loss in the 1997-2004 period was the result of significant overall losses up to 2000, equivalent to approximately 15.5 per cent, since in the 2001-2004 period there was a nominal gain of around Banco de Portugal | Annual Report|2004 49 Chapter 2 Economic policies 2 per cent. In both sub-periods, the “market share effect” was the main effect behind total CHANGE IN THE OVERALL SHARE AND changes in share. The negative impact of the STRUCTURE EFFECT structure by sector was also smoother in the IN 1997-2000 AND 2001-2004(a) more recent period. The difference in structure Change in overall share = total effect effect between the two sub-periods seems to be related to the cyclical developments of the Euro5 3.8 pean economy, which led to significant changes 2.0 in the demand for some products, given that the 0 specialisation of Portuguese exports by product -1.8 -2.6 has not changed significantly. First, European -5 -4.4 Union (EU) imports of “machinery”, including goods related to information and communica-10 -9.1 tion technology, showed very high growth in 1997-2004 1997-2000 -12.9 -13.5 -15 the second half of the 1990s and a negative aver2001-2004 -15.5 age rate of change in the last four years, in line -20 with developments in equipment investment in Total effect Market share effect Structure effect the EU15. In view of the non-specialisation of Portuguese exports on these products, a positive Structure effect by main groups of products structure effect emerged in recent years. Second, imports of “apparel and clothing accesso2 ries” and “footwear” from the EU15 increased 1.2 0.7 1 above total imports in the most recent period, in 0.5 0.5 0.4 0.2 contrast to developments between 1997 and 0 of which: -0.4 2000. The high share of these products in Portu-1 -0.7 -0.8 -0.9 guese exports translated also into a positive -1.3 -2 -1.8 -1.9 structure effect, although advantage was not 1997-2004 -2.6 1997-2000 -3 fully taken of this potential for export growth, 2001-2004 since there were further effective in market -4 share losses in those products. -4.4 -5 In sum, losses in share since 1997 largely reTotal Machinery Transport Clothing Footwear material flect the deterioration of the competitive position of the Portuguese economy. However, the Sources: Comext and Banco de Portugal. analysis for the last eight years leads to the conNote: clusion that Portuguese exports are excessively (a) Figures may not add up due to rounding. specialised in products whose markets grew below the average. Taking into account that technologically advanced products are those that usually benefit from higher demand growth, the significant weight of the so-called traditional products in Portuguese exports tends to have adverse effects on export behaviour. Accordingly, a productive specialisation of the Portuguese economy more based on technology-intensive industries and a more qualified labour force would have a favourable impact on export performance. Chart 2 50 Banco de Portugal | Annual Report|2004 Chapter 2 Economic policies BOX 2.4 HUMAN CAPITAL AS GROWTH FACTOR IN THE LONG RUN Human capital is one of the main factors behind economic growth. First, human capital raises productivity via an increase in the actual quantity of work. Indeed, a more qualified worker tends to perform his/her tasks more effectively, i.e., he/she produces more in the same period of time. Second, there is complementarity between certain types of physical capital and qualified work, wherefore adopting the existing technologies requires an adequate level of human capital. Third, human capital has a positive external effect in terms of promoting the technological development of an economy, given that a highly qualified population is more prone to generating new ideas in the scientific field, productive procedures and entrepreneurial organisation. Therefore, human capital also contributes to economic growth via the generation and dissemination of new ideas. According to an analysis made by the European Commission(1), a 1-year increase in the average schooling of population between 25 and 64 years of age is likely associated with an increase in productivity from 4 to 6 per cent in the short run, plus 3 per cent in the long run, due to its contribution to faster technological progress. In spite of considerable progress over the last two decades, Portugal shows very low human resources qualification. This reflects a deficit in terms of both the average number of schooling years and the quality and efficiency of the educational system. In 2002, only approximately one fifth of the population between 25 and 64 years of age had completed secondary education (Chart 1), compared with an average of 65 per cent in OECD countries. This quantitative gap in human capital is also clearly seen, albeit to a lower degree, in younger age groups. Despite the significant decrease in the percentage of people leaving school in elementary and secondary education in recent years, there is still a low level of completion of secondary education. In the age group from 25 to 34 years of age, this level is less than half the OECD average. Finally, in terms Chart 1 PERCENTAGE OF THE AGE GROUP WITH COMPLETE SECONDARY EDUCATION(a) 2002 100 25-64 25-34 90 In percentage 80 70 60 50 40 30 20 10 Korea Norway Czech Rep. Japan Slovak Sweden Canada Finland Switzerland US Austria Denmark Germany Hungary New Zealand France(b) Belgium Ireland Netherlands Australia Greece UK(b) Iceland Luxembourg Italy Spain Poland Portugal Turkey Mexico 0 Source: OECD— Education at a Glance 2004. Notes: (a) Excluding the programmes defined in the International Standard Classification of Education (ISCED) as 3C short programmes. (b) Not all ISCED 3 programmes meet minimum requirements for ISCED 3C long programmes. (1) European Commission (2003), European Economy, no 6. Banco de Portugal | Annual Report|2004 51 Chapter 2 Economic policies of the most advanced qualification levels, the ratio of graduates to total population is clearly lower than in the large majority of OECD countries. The economic growth potential resulting from investment in human capital obviously depends on its quality. It is very difficult, however, to assess the quality of knowledge and qualifications of the labour force, since these depend not only on formal education, but also on informal education and on working lifelong learning. Assuming these limitations, the assessment of knowledge quality has been based on international tests of the students’ performance. In this context, the PISA programme of the OECD(2) has gained relevance. It is intended to assess 15-year-olds’ skills to use their knowledge to solve particular problems, as well as their particular capabilities in areas such as reading, mathematics and sciences. In these international comparisons, Portugal usually ranks in the last positions in all test segments. In particular, in 2003, among the 29 OECD countries considered in the analysis, Portugal ranked 25th as regards the students’ capabilities to use their acquired knowledge to solve problems and Table 1 RESULTS OF THE 2003 PISA PROGRAMME Position 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Mathematics Reading Sciences Problem solving Japan Korea Switzerland Finland Belgium Czech Rep. The Netherlands New Zealand Australia Canada Austria Denmark France Slovakia Iceland Germany Sweden Poland Luxembourg Norway Hungary Spain Ireland US Italy Portugal Greece Turkey Mexico Finland Korea Canada Australia New Zealand Ireland Sweden The Netherlands Belgium Norway Switzerland Japan Poland France US Denmark Iceland Germany Austria Czech Rep. Hungary Spain Luxembourg Portugal Italy Greece Slovakia Turkey Mexico Finland Japan Korea Australia The Netherlands Czech Rep. New Zealand Canada Switzerland France Belgium Sweden Ireland Hungary Germany Poland Slovakia Iceland US Austria Spain Italy Norway Luxembourg Greece Denmark Portugal Turkey Mexico Korea Finland Japan New Zealand Australia Canada Belgium Switzerland The Netherlands France Denmark Czech Rep. Germany Sweden Austria Iceland Hungary Ireland Luxembourg Slovakia Norway Poland Spain US Portugal Italy Greece Turkey Mexico Source: OECD. 24th, 26th and 27th in specific skills in reading, mathematics and sciences, respectively (Table 1). Literacy tests for adults also showed very weak results. According to an OECD(3) study for population between 16 and 65 years of age, intended to assess the capabilities to understand texts, to identify and use information included in documents and to solve arithmetic operations, Portugal is in the second last (2) OECD (2004), “Learning for Tomorrow’s World: First results from PISA 2003" and ”Problem Solving for Tomorrow’s World First Measures of Cross Curricular Competencies from PISA 2003". (3) OECD (2000), “International Adult Literacy Survey, 1994-1998". 52 Banco de Portugal | Annual Report|2004 Chapter 2 Economic policies position in every field, among the 20 countries considered. With regard to working lifelong learning, available statistics suggest that Portugal is also in the last OECD positions in terms of time dedicated to professional training. Evaluating the efficiency of the educational system consists of comparing expenditure on education with the educational performance of the students. Expenditure on education in Portugal, when assessed in terms of Gross Domestic Product (GDP), has stood above the OECD average. In 2001, public expenditure on education reached approximately 5.9 per cent of GDP, whereas the average value for Chart 2 TOTAL PUBLIC EXPENDITURE ON EDUCATION(a) As a percentage of GDP (2001) Japan (c) Turkey Greece Slovak Rep. Ireland Spain Czech Rep Germany UK Korea Netherlands Italy Australia Mexico Hungary Canada(b) Switzerland US(b) Poland France Austria Portugal Belgium Finland Iceland NZ Norway Sweden Denmark (c) Elementary, basic and secondary College level Other 0 2 4 Per cent 6 8 10 Source: OECD. Notes: (a) Public expenditure includes transfers to households that are not spent in schooling institutions. (b) Non-college post secondary education is included in college-level and excluded from the remaining. (c) Non-college post secondary education is included in secondary level and in the college level. the OECD was 5.3 per cent (Chart 2). These figures partly reflect the strong investment recently made in education in Portugal, associated with the significant increase in the average number of the population’s schooling years. They also reflect, however, the small number of students per teacher, particularly in compulsory education(4) as a result of the low number of schooling hours, of the carrying out of administrative functions by teachers and of the geographical distribution of schools; the high wages of teachers vis-à-vis GDP per capita, particularly at the end of career; and the high failure rate in schools. In sum, expenditure on education in Portugal is above the OECD average, but the percentage of students that complete secondary education is lower and performance is worse in international comparison tests. It is therefore not surprising that, in the context of the OECD, Portugal usually stands in the last positions in terms of efficiency of the educational system. The non-resolution of such problems constrains the competitiveness of the Portuguese economy and the recovery of the real convergence process. The features of the Portuguese educational system suggest that the political interventions should be chiefly oriented towards the improvement of the students’ performance. Such interventions could be (4) In Portugal the average number of students per teacher in the elementary level is 11 (16.6 on average in the OECD). Banco de Portugal | Annual Report|2004 53 Chapter 2 Economic policies productive in a number of segments. First, evidence suggests that pre-school education fosters a better performance throughout the educational process, particularly in the case of poorer students(5). In this context, making pre-school education universal is an important objective. This process is already under way but should be intensified. Second, the students’ performance should be subject to common assessment steps during the educational period. This assessment should be public, scrutinised and used in the evaluation of schools and teachers. Third, the decisive importance of teachers’ quality for the performance of students is supported by recent empirical studies(6). Educational policy should encourage teachers to require the best possible performance from their students. These incentives may consist of differentiated wages, experimental periods of new teachers in schools before their allocation to the school, or the accountability of school headmasters in the selection of teachers(7). Finally, the autonomy of the school should be increased, promoting a transparent and public evaluation of concurrent models of school management. In parallel, parents should be allowed more freedom to select schools, which would have a concomitant impact on the financing of each school. (5) Rolnick, A. and R. Grunewald (2003), “Early Childhood Development: Economic Development with a High Public Return”, Federal Reserve Bank of Minneapolis, Fedgazette, March. (6) Hanushek, E., S. Rivkin and J. Kain (2002), “Teachers, Schools and Academic Achievement”, NBER Working Paper 6691. (7) Hanushek, E., S. Rivkin and J. Kain (2004), “How to Improve the Supply of High Quality Teachers”, in Diane Ravitch (ed.), Brookings Papers on Education Policy 2004, Washington, DC, Brookings Institution Press. 54 Banco de Portugal | Annual Report|2004 Chapter 2 Economic policies Box 2.5 NOMINAL AND REAL WAGE RIGIDITY: A MICROECONOMIC APPROACH (1) The economic debate surrounding wage rigidity is based on an ancient and noble tradition rooted in the Keynesian revolution. In this debate, the major concern lies in the existence of labour market frictions that hinder appropriate wage adjustments to changes in labour demand, generating imbalances than translate into unemployment. At an aggregate level, discussions have focused on the relationship between the rate of change of wages and the unemployment rate, empirically translated into the renowned Phillips curve. In a low-inflation regime such as the one presently prevailing in the euro area, nominal wage rigidities may create particular difficulties to firms that need to ensure wage concessions from their employees. In a macroeconomic approach, wage rigidity measures tend to reflect the imprecision and ambiguity associated with the difficulty in obtaining an operational measure for the cyclical sensitivity of wages. In turn, microeconomic approaches point to less disperse definitions, since they do not face the problems associated with the aggregation of the behaviour of heterogeneous agents. In effect, the detailed knowledge of the empirical distribution of individuals’ wage changes is particularly meaningful. Both the rare occurrence of wage changes below zero and the evidence of a strong peak of distribution at zero reveal some resistance to a nominal decline in wages (nominal rigidity). The existence of menu costs may be perceived in the scarcity of wage changes close to zero. In turn, real wage rigidity may be detected by identifying a peak in the wage change distribution corresponding to the value of the expected inflation rate and observing lower density of changes below (but close to) that rate (Diagram 1). Obviously, the use of wage change distributions to assess wage rigidity would be seriously jeopardised if wages were evaluated with severe measurement errors. If the presence of measurement errors in the collection of wage data is not excessive, it will nonetheless be possible to use filters permitting to recover the distribution of interest(2). Diagram 1 DISTRIBUTION OF WAGE CHANGES Observations shifted to zero due to menu costs Zero nominal change Observations shifted to zero due to nominal wage downward rigidity and to the presence of menu costs Observations shifted to the inflation rate due to real wage downward rigidity Zero real change (1) This work was developed in the context of the ECB “International Wage Flexibility Project”. (2) The correction is made admitting that the negative autocorrelation of wage changes is chiefly generated by measurement errors in the registry of wages. Banco de Portugal / 2004 Annual Report 55 Chapter 2 Economic policies Chart 1 DISTRIBUTIONS OF WAGE CHANGES 1993 1992 1994 30% 35% 40% 45% 50% 35% 40% 45% 50% 15% 10% 0 5% 15% 10% 5% 0 -5% -10% -15% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0 -5% -10% -15% 50% 45% 40% 35% 30% 0 25% 0 20% 0.05 15% 0.05 0 10% 0.1 5% 0.1 0.05 0 0.15 -5% 0.15 0.1 -10% 0.15 -15% 0.2 -20% 0.2 -25% 0.2 50% 0.25 45% 0.25 40% 0.25 35% 0.3 30% 0.3 25% 0.3 20% 0.35 15% 0.35 -20% 2000 -25% 1999 0.35 10% -20% -25% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0 -5% -10% -15% -20% 50% -25% 0.35 1998 5% 25% 0 0 30% 0 -5% 20% 0 -10% 25% 0.05 -15% 20% 0.05 45% 0.05 40% 0.1 35% 0.1 30% 0.15 0.1 25% 0.15 20% 0.2 15% 0.2 0.15 10% 0.2 5% 0.25 0 0.25 -5% 0.3 0.25 -10% 0.3 -15% 0.3 -20% 0.35 -25% -5% 1997 0.35 -20% -10% 1996 1995 -25% -15% -25% 50% 45% 40% 35% 30% 25% 20% 15% 10% 0 5% -5% -10% -25% -15% 0 -20% 0 50% 0.05 0 45% 0.05 40% 0.1 0.05 35% 0.1 30% 0.1 25% 0.15 20% 0.15 15% 0.15 10% 0.2 0 0.2 5% 0.25 0.2 -5% 0.25 -10% 0.3 0.25 -15% 0.3 -20% 0.3 -25% 0.35 -20% 0.35 0.35 Source: Ministério do Trabalho e da Solidariedade Social (Quadros de Pessoal). 56 Banco de Portugal | Annual Report|2004 Chapter 2 Economic policies In Portugal, the use of individual registrations from the “Quadros de Pessoal” database to obtain data on the behaviour of wages (specifically the contractual wage) safeguards against a contamination of data by measurement errors(3). Chart 1 presents the wage change distributions of employees that remained in the same firm for two consecutive years in the period from 1992 to 2000. The analysis of the histograms shows that: – first, a significant peak (a mode) at zero; – second, the relative scarcity of negative nominal wage changes; – third, the presence of a second mode emerging around values that are not far away from an estimate of the expected inflation rate; – and fourth, the perception that nominal wages have increased more moderately at the end of the 1990s and that the dispersion of wage changes also narrowed slightly. Given that histograms outline a clear notion of nominal and real wage rigidity in the Portuguese labour market, it is necessary to compress data included in those histograms in a narrow group of parameters. The measures of rigidity computed are based on the comparison between the distribution of actual wage changes and a counterfactual distribution that would prevail in the absence of wage rigidity. Two alternative identification strategies were considered in the construction of counterfactual distributions: the definition of a parametric distribution characterising an ideal type of wage change distribution in the absence of wage rigidity; and the assumption that wage rigidity effects are only observed below the median and that the wage change distribution would be symmetric in the absence of rigidity. For instance, in the absence of real wage rigidity and menu costs, the share of employees receiving wages that are rigid to decline (i.e., the measure of nominal rigidity) would be computed as one minus the ratio of observations below zero to observations above twice the median (Diagram 2). Such indicators identify the share of individuals that are subject to the different types of wage rigidity. The different indicators of nominal wage rigidity show high values and stable developments during the period under review (see Chart 2). The evidence indicating that nominal wage rigidity would stand at around 70 per cent means that the rate of change of nominal wages moves to zero in apDiagram 2 proximately 70 per cent of total workers facing THE MEASURE OF NOMINAL RIGIDITY nominal wage cuts. Severe nominal rigidity is all the more understandable in that nominal wage Median inflexibility has for decades been enshrined in the Portuguese legal system. 0 2xMedian The indicator of real wage rigidity also shows high values (Chart 3), chiefly when considered in an international context(4). Its trend, however, is Degree of nominal less precise and more irregular. In any case, it rigidity = 1-A/B seems to be significant that (on average) approximately one third of employees facing cuts in their real wages see wage changes moving to values B A close to the inflation rate. There is still some evidence indicating that part of the potential changes in wages expected to (3) The contractual wage concept is the one that better matches the wage notion under analysis. The use of data on total wages (including seniority bonuses, productivity premia and other regular allowances) does not change significantly the results obtained. (4) International comparisons, however, cannot be overemphasised. Comparability is not ensured, as data sources are rather heterogeneous, use different wage concepts and, above all, have different degrees of measurement errors. Banco de Portugal / 2004 Annual Report 57 Chapter 2 Economic policies Chart 3 Chart 2 REAL WAGE RIGIDITY NOMINAL WAGE RIGIDITY 1 1 0.9 0.9 0.8 0.8 0.7 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.3 0.3 0.2 0.2 0.1 0.1 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: Ministério do Trabalho e da Solidariedade Social (Quadros de Pessoal). 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: Ministério do Trabalho e da Solidariedade Social (Quadros de Pessoal). Chart 4 MENU COSTS stand at values very close to zero will eventually not occur (Chart 4). Wage rigidity due to menu 1 costs, however, tends to affect a limited contingent of workers. 0.75 In low inflation periods, it is more difficult to ensure the necessary conditions for the identifi0.5 cation of the different types of wage rigidity. It may happen that expected inflation is not sufficiently distanced from zero to be able to separate 0.25 the effects of nominal rigidity, real rigidity and menu costs. Against this background, it is also 0 possible to obtain aggregate estimates of wage ri1992 1993 1994 1995 1996 1997 1998 1999 2000 gidity. The aggregate indicator of real and nominal wage rigidities shows high values, as exSource: Ministério do Trabalho e da Solidariedade Social pected, but does not point to a deterioration of (Quadros de Pessoal). wage rigidity in tandem with the decline in the inflation rate (Chart 5). The suggested presence of significant microeconomic wage rigidity in the Portuguese labour market contrasts with the old reputation of strong aggregate flexibility of real wages. These two lines of research, however, are not necessarily incompatible. On the one hand, they characterise different periods in the Portuguese economy. On the other hand, they accommodate differently the changes in the composition of employment during the economic cycle. Recent empirical evidence suggests that the cyclical sensitivity of real wages is clearly high in new hires but only moderate in the other workers. This seems to indicate the presence of obstacles to the adjustment of wages of workers that remain in the same firm(5). In a low inflation regime, strong nominal wage rigidity may seriously hinder the behaviour of firms, leading them - when confronted with the need to react to negative chocks (that may be triggered, for instance, by intensified competition in product markets) - to adjust employment instead of wages, 58 Banco de Portugal | Annual Report|2004 Chapter 2 Economic policies thus increasing the level of unemployment . The features of the Portuguese wage bargaining system ensure some flexibility to firms that pay their employees above contractual wages set by collective bargaining(6). This wage cushion may, however, be shrinking, or simply proving insufficient to accommodate permanent shocks in output demand. Chart 5 NOMINAL AND REAL WAGE RIGIDITIES 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: Ministério do Trabalho e da Solidariedade Social (Quadros de Pessoal). (5) See Carneiro, A. and Portugal, P. (2004),“Workers’ Accessions and Separations Real Wage Cyclicality,” Working Paper 9-2004, Banco de Portugal. (6) See Cardoso A.R. and Portugal, P. (2005),“Contractual Wages and the Wage Cushion under Different Bargaining Settings”, Journal of Labor Economics, October. Banco de Portugal | Annual Report|2004 59 Chapter 3 Output, expenditure and external accounts 3 Output, expenditure and external accounts The estimates of Banco de Portugal point to 1.1 per cent growth of the Portuguese economy in 2004, after a contraction of similar magnitude in the previous year (Table 3.1). Despite the recovery, GDP growth stood below the euro area average for the third year in a row (Chart 3.1). In fact, Portugal has been one of the European Union (EU) countries with worst economic performance over the past few years, and GDP growth continued to be amongst the lowest in 2004. In 2004, and conversely to the previous two years, Portuguese economic growth resulted from buoyant domestic demand, largely reflecting developments in private consumption, and a negative contribution from net external demand, which resulted from a very high increase in imports (Chart 3.2). Exports of goods and services recorded slightly higher growth than in 2003, due to the strong recovery in exports of services. Despite the acceleration of foreign demand, exports of goods decreased sharply, which translated into a significant loss in market share. The growth pattern observed in 2004 translated into a further rise in indebtedness of the non-financial private sector, particularly households, as well as into a notice- able worsening of external accounts, which interrupted the adjustment trend seen in the previous two years. The intra-annual profile of GDP was rather pronounced as activity showed a significant deceleration in the second half of the year in spite of continued dynamism of domestic demand, particularly of private consumption. 3.1 Output The recovery of Portuguese economic activity in 2004 was common to most sectors of activity (Table 3.2). As in previous years, the services sector continued to grow at a faster pace than that of GDP, and therefore its relative importance in the Portuguese productive structure continued to grow. Activity in manufacturing industry was stable in the year as a whole, after a 1 per cent contraction in 2003, with most industrial activities showing a recovery. The main exceptions to this were the significant decrease of output in “textiles, clothing, leather and footwear”, reinforcing the sector’s loss of importance in the Portuguese productive structure, and the deceleration in the “metal products, machinery and transport equipment” sector, mainly due to the decrease in the production of transport material. Activity decreased further in the construction sector, Table 3.1 GDP AND MAIN EXPENDITURE COMPONENTS(a) Real rate of change, per cent 1999 2000 2001 2002 2003 2004 GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 3.4 1.7 0.4 -1.1 1.1 Private consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GFCF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in inventories(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Domestic demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contribution of domestic demand to GDP(b) . . . . . . . . . . Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Imports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contribution of net foreign demand to the GDP(b). . . . . . 5.1 5.6 5.9 6.4 -0.1 5.4 5.9 5.4 3.8 9.8 9.3 -2.1 2.7 3.8 2.4 3.8 -0.4 2.8 3.1 8.4 8.0 9.7 5.6 0.3 1.2 3.9 1.0 0.8 0.1 1.6 1.8 0.6 0.4 1.3 0.7 -0.1 1.0 1.7 -5.3 -5.1 -0.1 -0.5 -0.5 2.4 2.3 2.7 -0.5 0.9 -0.1 0.3 -10.6 -9.9 -0.2 -2.5 -2.7 4.5 7.1 -1.7 -0.4 1.6 2.5 0.9 2.2 1.3 0.2 2.1 2.2 5.2 3.9 8.3 7.4 -1.1 Sources: INE and Banco de Portugal. Notes: (a) Banco de Portugal estimates derived from INE’s National Accounts from 1995 to 2003 (ESA95). (b) Contribution to the GDP rate of change in percentage points. Banco de Portugal| Annual Report|2004 61 Chapter 3 Output, expenditure and external accounts Chart 3.1 Chart 3.2 GROSS DOMESTIC PRODUCT BREAKDOWN OF THE CHANGE IN GDP Real rate of change Contributions 5 Diferential, in percentage points Portugal Euro area 4 12 Imports 10 Exports Domestic demand 8 Percentage points Per cent 3 2 1 0 GDP (real rate of change, per cent) 6 4 2 0 -2 -4 -1 -6 -2 1996 1997 1998 1999 2000 2001 2002 2003 -8 2004 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sources: INE and Banco de Portugal. Sources: Eurostat, INE and Banco de Portugal. albeit much less markedly than in 2003, and grew in the agriculture, forestry and fishing sector, after the contraction observed in the previous year. The acceleration of activity in the services sector was due to the behaviour of market services, given that non-market services, which mainly include services provided by general government, decreased slightly vis-à-vis the previous year. The improved performance of market services was common to most main sub-sectors: “trade and repair”, “hotels and restaurants”, “transport and communications”. In turn, “financial intermediation” maintained a high growth rate (see Supplementary Table A.3.1.). After the declines observed in the previous year, the recovery of activity in “trade and repair” and “hotels and restaurants” sectors was in line with the behaviour of private consumption and also with the more favourable developments in the tourism activity in Portugal, which also contributed to the significant recovery recorded by the air transports sub-sector. On the other hand, the strengthening of activity in the communications sector continued to reflect strong growth of mobile telecommunication services, given that the fixed-line telecommunication service Table 3.2 GROSS VALUE ADDED BY SECTOR OF ACTIVITY(a) Real rate of change, per cent Weights in 2003 1999 2000 2001 2002 2003 2004 GDP (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 3.8 3.4 1.7 0.4 -1.1 1.1 Agriculture, forestry and fishing . . . . . . . . . . Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Electricity, gas and water . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . Services(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 17.3 2.9 7.0 69.0 7.0 0.6 4.5 2.9 3.6 -3.9 2.2 5.9 4.9 3.7 -0.5 1.2 3.8 2.6 2.3 5.7 -0.6 -2.9 -3.7 1.3 -3.0 -1.0 10.7 -13.2 0.5 2.0 0.0 5.2 -1.2 1.6 Sources: INE and Banco de Portugal. Notes: (a) Banco de Portugal estimates derived from INE’s National Accounts from 1995 to 2003 (ESA95). (b) GDP at market prices. The nominal value of GDP includes, in addition to sectoral GVAs, VAT and import taxes. (c) Net of financial intermediation services indirectly measured that are considered as intermediate consumption. 62 Banco de Portugal| Annual Report|2004 Chapter 3 Output, expenditure and external accounts continued to show unfavourable developments. Although remaining relatively stable in the year as a whole, manufacturing activity recorded a negative change in the second half of the year. In fact, both the production index in manufacturing and the deflated turnover index in industry decelerated significantly in the second half of 2004. Several reasons may have contributed to the sluggish behaviour of Portuguese manufacturing. At the international level, commodity and energy prices increased, in a context of growing international competition, in parallel with the cumulative appreciation of the euro. Moreover, at the domestic level, the differential of unit labour cost growth vis-à-vis trading partners remained positive. 3.2 Expenditure Domestic demand grew about 2 per cent in 2004, after the 2.5 per cent decline seen in 2003. Expenditure components that are more sensitive to the stage of the business cycle - such as investment in equipment and household expenditure on durable goods - recorded a marked recovery. The high import content of these expenditure components contributed to the marked increase in imports - whose real growth was higher than 7 per cent - and translated into a negative contribution of net external demand to GDP growth, despite the slight acceleration in exports. As mentioned above, the recovery profile of Portuguese economic activity was not uniform throughout the year. On the expenditure side, the GDP profile resulted from the deceleration in investment and, particularly, in exports, given that private consumption did not lose momentum in the second half of the year. Moreover, imports, which recorded very high growth throughout the year, also decelerated slightly, but not enough to offset the deceleration in exports. The intra-annual behaviour of GDP was similar to that observed in the euro area, and probably was partly related to the increase in international commodity prices and to the appreciation of the euro exchange rate, in a context of increased international competi- Banco de Portugal| Annual Report|2004 tion from trading partners outside the euro area. However, the intra-annual profile of Portuguese economic activity was also influenced by temporary factors in the second quarter, whose subsequent unwinding deepened the deceleration in activity in the second half of the year(1). The pattern of marked deceleration in Portuguese economic activity during the second half of the year that is apparent from the Banco de Portugal estimates is consistent with the quarterly national accounts of INE, and is also visible in the monthly coincident indicator of Banco de Portugal (Chart 3.3). In 2004 private consumption grew by 2.5 per cent in real terms, reversing the deceleration trend seen over the past few years, and maintained high growth rates throughout the year. Although it was more marked in the class of durable goods, which is traditionally more sensitive to the business cycle, the recovery of private consumption was broadly based. Consumption expenditure on motor vehicles was particularly strong. Sales of passenger vehicles grew about 4 per cent, after a decline of around 16 per cent in 2003, with particular emphasis on the increase in the sales of high-range cars. The retail trade turnover index of durable goods, excluding motor vehicles, also recovered strongly in real terms, in contrast to the decline of about 7 per cent in 2003. Current consumption also recovered from the previous year, with a real growth rate of around 2 per cent(2). The retail trade turnover index of non-durable goods increased about 2.5 per cent in real terms, after a decline of over 1 per cent in 2003. The recovery of private consumption was consistent with higher growth of household (1) Among the temporary factors that favoured economic growth in the second quarter of 2004, reference should be made to the base effect caused by the strong GDP contraction in the corresponding quarter of the previous year and to the hosting of the European Football Championship in Portugal in June 2004. (2) In 2004, some statistical uncertainty factors, associated with the European Football Championship, may have given rise to some overestimation, albeit small, of current consumption expenditure. For a detailed explanation, see Section 5 Expenditure and Output, in the September 2004 issue of the Economic Bulletin of Banco de Portugal. 63 Chapter 3 Output, expenditure and external accounts disposable income. Household disposable income accelerated in 2004, growing by about 1 per cent in real terms, after the almost nil change observed in the previous year. The strengthening of disposable income was mainly due to the acceleration of labour compensation, given that corporate and property income maintained an almost nil change (Table 3.3). Higher growth of labour compensation reflected a positive change in real compensation per employee, in contrast to the reduction seen in 2003, as well as more favourable developments in the number of employees. Transfers to households continued to grow at a high pace in 2004, clearly above the growth of disposable income, reflecting the significant increase in social benefits paid by the government, in particular related to pensions, similarly to previous years. In fact, domestic transfers, which are not directly associated with the remuneration of households’ factors of production, accounted for almost 30 per cent of household disposable income, recording a 7.5 per cent growth rate in 2004 (Chart 3.4). Chart 3.3 QUARTERLY CHANGE IN GDP AND MONTHLY COINCIDENT INDICATOR OF BANCO DE PORTUGAL Year-on-year rate of change Activity coincident indicator 6 Quarterly year-on-year rate of change in GDP (INE's Quarterly National Accounts (a) 5 4 Per cent 3 2 1 0 -1 -2 -3 Jan.96 Jan.98 Jan.00 Jan.02 Jan.04 Sources: INE and Banco de Portugal. Note: (a) For the three months in each quarter, the corresponding quarterly value of the year-on-year rate of change was used. Table 3.3 HOUSEHOLD DISPOSABLE INCOME(a) Nominal rate of change, per cent Household disposable income . . . . . . . . . . . . . . . . . . . employees(c) 1999 2000 2001 2002 2003(b) 2004 6.1 9.0 6.1 4.0 3.0 3.5 Compensation of ................... Corporate and property income . . . . . . . . . . . . . . . . . . Current transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Domestic transfers. . . . . . . . . . . . . . . . . . . External transfers . . . . . . . . . . . . . . . . . . . Direct taxation (-). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social security contributions (-). . . . . . . . . . . . . . . . . . . Adjustment for the change in net equity of households in pension fund reserves . . . . . . . . . . . . . 7.8 2.5 7.4 8.2 3.4 7.1 5.6 9.5 7.6 11.4 11.5 11.2 12.1 11.8 7.1 3.5 8.2 9.0 3.9 6.2 7.2 5.0 4.1 3.3 8.1 -23.5 1.6 7.2 2.1 0.0 8.1 10.7 -12.6 -0.5 2.2 4.6 0.3 6.9 7.5 0.5 4.6 7.1 -37.0 61.0 -24.8 -2.9 -63.1 2.3 Memo: Private consumption. . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings rate (as a percentage of disposable income). Consumer price index. . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 -4.7 9.0 2.3 6.2 37.8 11.4 2.9 5.1 13.4 12.2 4.4 4.4 1.3 11.8 3.6 3.1 2.5 11.8 3.3 5.0 -8.4 10.4 2.4 Sources: INE and Banco de Portugal. Notes: (a) Banco de Portugal estimates derived from INE’s National Accounts from 1995 to 2003 (ESA95). (b) In 2003, figures adjusted for the effects of the sale of tax credits by the general government. For more details, see “Box 6.1 Budgetary effects of the temporary measures implemented from 2002 to 2004” in Chapter 6 Public finances. (c) Remuneration received by resident households. Includes social security contributions by employers and government transfers to the Caixa Geral de Aposentações. 64 Banco de Portugal| Annual Report|2004 Chapter 3 Output, expenditure and external accounts Chart 3.4 Chart 3.5 DOMESTIC TRANSFERS TO HOUSEHOLDS PORTUGAL– CONSUMER CONFIDENCE INDICATOR As a percentage of disposable income Unemployment benefits 0 Other benefits Pensions Balance of respondents - mm3 (s.a.) 30 Per cent 25 20 15 10 5 0 1999 2000 2001 2002 2003 2004 Sources: INE and Banco de Portugal. However, private consumption growth exceeded that of disposable income, leading to a decline of about 1.5 percentage points (p.p.) in the savings rate. The perception that the deterioration of the economic outlook would be less marked than previously thought and that the effort towards fiscal consolidation would be less intense than initially expected probably contributed to stimulate private consumption in 2004. This hypothesis seems to be consistent with the recovery of the consumer confidence indicator, and with the fact that consumers’ expectations regarding current and future savings dropped to an historical low in the last quarter of 2004 (Chart 3.5). In parallel, very low interest rates and new forms of credit contracts, allowing in particular a lengthening of loan maturities, eased liquidity constraints, facilitating the expansion of consumer expenditure. Indeed, the possibility of extending the residual maturity of loans may have contributed to a decline in the “compulsory” savings component annually allocated to the repayment of debts previously incurred, therefore releasing resources that may be used for consumption. According to Banco de Portugal estimates, real public consumption continued to record a positive change (0.9 per cent), accelerating slightly vis-à-vis 2003(3). Data on the number of beneficiaries of Caixa Geral de Aposentações Banco de Portugal| Annual Report|2004 -10 -20 -30 -40 -50 -60 -70 1990 Consumer confidence indicator Current savings Savings over the next 12 months 1992 1994 1996 1998 2000 2002 2004 Source: European Commission. point to a stabilisation of staff costs in real terms, as had already happened in 2003. Therefore, the acceleration of real public consumption was mainly due to the behaviour of expenditure on goods and services, particularly the strong increase in transfers in kind to households regarding drugs-related spending. In 2004 total gross fixed capital formation (GFCF) grew by 1.3 per cent in real terms, after very strong declines in the previous two years. Thus, in spite of the recovery of investment in 2004, real GFCF still stood about 10 per cent below the level in 2001. Investment recovered in the first half of 2004, subsequently slowing down towards the end of the year. The improvement in demand prospects, particularly in the first half of the year, as well as the maintenance of very favourable financing conditions, influenced positively corporate investment, despite the high level of corporate indebtedness. In fact, corporate investment recovered in 2004 as a whole, recording a growth rate above 2 per cent, in contrast to the significant contractions seen over the past few years. GFCF by households also recovered, albeit still recording an almost nil rate of change in 2004. In particular, household investment in housing recorded a slight decline, but much smaller (3) For more details, see Chapter 6 Public finances. 65 Chapter 3 Output, expenditure and external accounts than in the previous year. This is consistent with developments in the net flow of credit(4) to households for house purchase which fluctuated, in nominal terms, around 0.5 per cent (against a decline of almost 14 per cent in 2003). After the declines previously observed, GFCF of the general government also recorded an almost nil change in real terms. The more favourable developments in GFCF were common to all its components: construction, machinery and metal products, and transport equipment. Investment in construction recorded a marginally negative rate of change, after a decline of almost 12 per cent in 2003. The recovery of investment in construction reflected more favourable developments in the different sub-sectors, particularly in the public works sub-sector. Investment in machinery and metal products grew by 6.5 per cent, after considerable declines in previous years, in line with the improvement of corporate confidence and financing conditions. The recovery of GFCF in transport equipment was due to the strong increase in investment in motor vehicles, given that investment in other transport equipment declined markedly. Sales of new light and heavy commercial vehicles recorded significant growth rates in 2004 (3.2 and 23.9 per cent respectively), in contrast to the reductions observed in the two previous years. Growth of exports of goods and services in real terms stood at 5.2 per cent, i.e. 0.7 p.p. above that seen in the previous year. These developments were due to different behaviours of exports of goods and services. Exports of goods slowed down significantly, particularly in the second half of the year, while exports of services grew by more than 8 per cent in real terms. Exports of tourism services, which are very sensitive to developments in the international economy, recovered markedly, fostered by the impact of the hosting of the European Football Championship (see “Box 3.1 Some considerations on the impact of the European Football (4) Obtained by the difference between balances at the end of the year adjusted for securitisation operations and corrected for reclassifications, asset deductions and foreign exchange and price revaluations. 66 Championship on the Portuguese economy in 2004“). The slowdown in exports of goods in 2004 is in contrast to developments in external demand for Portuguese goods and services, and translated into a significant loss in market share vis-à-vis the previous year (Chart 3.6). However, a significant part of market share gains in 2003 was associated with a special contract regarding the export of motor vehicles during that year, which translated into a negative base effect in 2004. Moreover, gains of market share in 2003 have also been influenced by the contraction in domestic demand, which probably induced domestic firms to redirect their sales to external markets, even if at the expense of a strong decline in their profit margins (Chart 3.7). In 2004, in addition to the base effect mentioned above, the competitive position of Portuguese exports did not allow market shares to be maintained, despite a further contraction in profit margins. Relative cost indicators usually calculated by Banco de Portugal point to a marked deterioration in the competitiveness of Portuguese exports over the past few years, largely due to a higher growth of unit labour costs in Portugal(5). This result is especially adverse on account of the gradual liberalisation of international markets and the consequent increase of competition with third countries in export markets, particularly in the context of an appreciation of the euro. Losses in export market share were relatively widespread by types of product. The productive specialisation of Portuguese exports is characterised by a still significant weight of the so-called traditional products. The latter are subject to higher competition from new participants in international markets and benefit from lower trend growth in demand, which negatively influences the behaviour of market share. In fact, Portuguese exports of this type of products, which include textiles, clothing and footwear, continued to show an unfavourable behaviour in 2004, and in some cases recorded significant declines. (5) See section 2.3 Competitiveness and structural policies. Banco de Portugal| Annual Report|2004 Chapter 3 Output, expenditure and external accounts Chart 3.6 Chart 3.7 MARKET SHARE OF PORTUGESE EXPORTS OF GOODS(a) UNIT PROFIT MARGIN IN THE EXPORT SECTOR Real rate of change Rate of change 12 10 Market share Profit margin Foreign demand (b) 8 Portuguese exports 8 Exports of goods deflator 6 6 4 4 Per cent Per cent Aggregate cost (a) 2 0 2 0 -2 -2 -4 -4 -6 -6 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sources: European Commission, UK Office for National Statistics, INE and Banco de Portugal. Notes: (a) Real growth of total exports of goods (excluding exit from the territory of aircraft equipment after being repaired) vs. real growth of foreign demand. An increase means a gain in the market share of Portuguese exports. (b) Real growth of imports of goods from major trading partners. The 17 countries selected account for approximately 90 per cent of total exports. Each individual country was weighted according to its share as export market in the previous year. Data available also point to considerable losses in market share of Portuguese exports of transport equipment and machinery and equipment, in the context of a recovery in the demand for this type of product at the international level, after unfavourable developments in the previous years. Despite strong growth in world imports of this type of products in 2004, Portuguese exports of some of these goods declined significantly, as is the case of several motor vehicles and electric and electronic equipment and components. Market share losses occurred for both intra and extra euro-area exports, and were particularly significant in the German and British markets (Table 3.4). In these two markets, Portuguese exports of goods such as textiles, clothing and footwear, various electrical apparatus and equipment, and motor vehicles recorded Banco de Portugal| Annual Report|2004 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sources: INE and Banco de Portugal. Note: (a) Unit labour costs in manufacturing and intermediate goods imports deflator, aggregated according to the wage and import content of exports of goods and services obtained from the supply and use table of the National Accounts of the INE for 1999. particularly high losses in market share. This seems to be associated with intense competition from Central and Eastern European economies, in the case of Germany, and from a number of Asian developing countries, in the case of the United Kingdom. In recent years, there has been a growing integration of the German economy with some Central and Eastern European countries, in particular with the new Member States of the European Union, in terms of both international trade and direct investment, with the subsequent shift of some phases of the German productive process to these countries. At the same time, export and direct investment relationships between Portugal and Germany reveal some weakening, with the relative importance of the latter country as a market of destination of Portuguese exports gradually declining over the past few years (Chart 3.8). By contrast, growing economic integration between Portugal and Spain is increasingly apparent, in terms of both international trade and direct investment. Portuguese 67 Chapter 3 Output, expenditure and external accounts Table 3.4 PORTUGUESE EXPORTS, FOREIGN DEMAND AND MARKET SHARE Nominal rate of change in euro, per cent Portuguese exports(a) Foreign demand(b) Market share Pesos 2003 2002 2003 2004 2002 2003 2004 2002 2003 2004 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 1.9 2.3 4.5 -1.5 0.3 9.2 3.5 1.9 -4.3 66.9 1.8 2.3 6.2 -1.3 2.1 9.7 3.1 0.2 -3.3 23.8 14.8 13.2 10.6 -5.3 8.3 16.2 -14.3 -0.1 13.8 -6.1 12.8 1.4 -3.7 -1.8 4.8 2.6 -0.7 13.0 7.8 7.6 9.1 -1.6 10.3 10.8 -16.4 0.6 0.7 -13.0 4.8 33.1 2.0 2.8 2.4 -1.8 -5.4 7.5 3.9 8.7 -4.7 10.3 5.7 3.5 2.1 1.5 1.9 -3.9 9.0 -1.9 -3.5 -4.3 -9.9 7.9 5.8 5.5 5.8 6.1 13.1 -11.0 3.1 2.3 7.1 3.9 1.5 3.8 8.2 0.8 3.2 -4.0 Intra- euro area. . . . . . . . . . . . . . . . of which: Spain. . . . . . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . . . France. . . . . . . . . . . . . . . . . . . . Extra-euro area . . . . . . . . . . . . . . . . of which: United Kingdom . . . . . . . . . . US . . . . . . . . . . . . . . . . . . . . . . . Memo: Total (real rate of change) . . . . . . . . . Sources: INE, European Commission, UK Office for National Statistics and Banco de Portugal. Notes: (a) Portuguese exports of goods by country of destination based on INE’s International Trade Statistics. The rates of change for total goods exported exclude the exit from the territory of aircraft equipment after being repaired. (b) Weighted average of nominal growth in imports of goods denominated in euro from the 17 major trading partners. Each individual country was weighted according to its share in the Portuguese exports of goods in the previous year. The 17 countries selected are the destination of approximately 90 per cent of total exports. exports to Spain, which account for almost 25 per cent of total exports, continued to grow significantly in 2004, which seems to have contributed to maintain the share of Portuguese producers in this market. Portuguese exports to the French market also showed favourable developments, with some gains of market share for Portuguese producers. Imports of goods and services increased by 7.4 per cent in real terms after the decline of about 0.5 per cent in 2003, posting very high growth rates throughout the year. The significant recovery of those expenditure components that are more sensitive to the cycle and have higher import content, such as investment in equipment and expenditure on consumer durables, translated into higher recourse to external supply. However, the increase in imports of goods and services in 2004 seems to be higher than that suggested by developments in the different overall demand components weighted by the corresponding import contents, which may to some extent be due to the significant real appreciation, partly associated with developments in the euro ex- 68 change rate (Chart 3.9). The downward trend of the relative price of imports of consumer and equipment goods led to a substantial increase in the real import penetration rate, which indicates that domestic production is being replaced by imported goods at lower prices (Chart 3.10). The cumulative appreciation of the euro in the recent period boosted purchases of goods and services abroad, in particular of extra-Community origin. In fact, imports of goods, excluding fuel, from non-euro area countries posted nominal growth above 10 per cent. In particular, imports from the USA recorded very high growth, above 30 per cent. However, when analysing imports of goods by markets of origin, it is possible to conclude that Spain, Germany and France continued to be the main partners, accounting together for more than 50 per cent of the total import value (particularly Spain with a weight of about 30 per cent). Again, special reference should be made to the gradual integration of trade with Spain, although on the import side Germany did not lose its relative importance, as opposed Banco de Portugal| Annual Report|2004 Chapter 3 Output, expenditure and external accounts Chart 3.8 Chart 3.10 PORTUGUESE EXPORTS OF GOODS BY MAIN COUNTRIES OF DESTINATION RATE OF IMPORT PENETRATION OF GOODS AND SERVICES FOR FINAL USE(a) Weights in total Rate of change 30 Spain France Germany United Kingdom 12 25 In value 8 20 6 Per cent Per cent In volume 10 15 10 4 2 0 -2 5 -4 0 1985 1988 1991 1994 1997 2000 -6 2003 1997 Source: INE. 1998 1999 2000 2001 2002 2003 2004 Sources: INE and Banco de Portugal. Note: (a) Nominal (real) growth of imports of goods and services for final use (excluding intermediate goods, fuels and other services supplied to corporations) versus nominal (real) growth of domestic demand. An increase denotes a higher penetration of foreign products in national market. Chart 3.9 IMPORTS OF GOODS AND SERVICES AND WEIGHTED GLOBAL DEMAND Real rate of change, per cent 16 1998 Imports of goods and services 14 Chart 3.11 PORTUGUESE IMPORTS OF GOODS BY MAIN COUNTRIES OF DESTINATION 12 1997 10 1999 Weights in total 2004 8 1996 6 35 2000 4 2 France Germany United Kingdom 30 2001 0 2002 2003 -2 25 0 2 4 6 Weighted global demand 8 10 Sources: INE and Banco de Portugal. Per cent -2 Spain 20 15 10 5 to exports (Chart 3.11). Strong growth of Portuguese imports in 2004 was common to most products, but particularly marked in goods characterised by a high elasticity of demand. In fact, the increase in purchases abroad of motor vehicles, sundry machinery, computers and computer equipment, radio, television and communication equipment was particularly high. There was also a very significant increase in the purchase Banco de Portugal| Annual Report|2004 0 1985 1988 1991 1994 1997 2000 2003 Source: INE. of iron and steel products and chemical products, including pharmaceutical products and plastic products, while imports of clothing continued to record high growth, as in previous years. The value of imported fuels also in- 69 Chapter 3 Output, expenditure and external accounts creased markedly in 2004, by around 23 per cent, mainly due to the strong increase in the international oil price(6). 3.3 Current and capital accounts The growth pattern of the Portuguese economy in 2004, based on the strong expansion of private domestic demand, translated into a further increase in indebtedness of the non-financial private sector, particularly households, as well as into a significant worsening of external accounts. Net external borrowing requirements of the Portuguese economy, as measured by the joint deficit of the current and capital accounts, rose to 5.9 per cent of GDP in 2004 (3.3 per cent of GDP in 2003) (Table 3.5). The financing of the current and capital account deficits implied a further increase in external borrowing by the resident financial sector, which is responsible for the intermediation of most external funds raised, and also by the general government and the non-financial corporations(7). (6) Detailed information on international trade by type of product and by country of destination / origin can be found in Supplementary Tables A.3.6 to A.3.15. The widening spread between domestic savings and investment resulted mainly from the decline in savings, given that investment, as a percentage of GDP, increased only slightly (Chart 3.12). These developments contrast with the decline in the external deficit seen in the two previous years, and mark an interruption of the adjustment process of macroeconomic imbalances in the Portuguese economy. Although the widening of the external deficit in 2004 mainly reflects the behaviour of the private sector, the general government deficit, when adjusted for temporary measures, records a value (5.2 per cent of GDP) close to that of the external deficit. In 2004, the private sector showed again net borrowing requirements of around 0.7 per cent of GDP, in contrast to the net financing capacity of 2 per cent of GDP in 2003(8). As mentioned above, the persisting favourable financing conditions and the increase in consumer confidence led to a high growth of private consumption and a decline in the household sav(7) For a detailed analysis of the types of external financing of the Portuguese economy, as well as of the financial operations of the various resident institutional sectors, see Chapter 7 Financial situation. Table 3.5 NET LENDING(+) / NET BORROWING(-) BY SECTOR(a) As a percentage of GDP 1999 2000 2001 2002 2003(b) 2004(b) Private sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Households. . . . . . . . . . . . . . . . . . . . . . . . . . Corporations. . . . . . . . . . . . . . . . . . . . . . . . . Non-financial corporations . . . . . . . Financial sector . . . . . . . . . . . . . . . . . -3.4 -6.0 -4.7 -3.3 2.0 -0.7 -0.1 -3.4 -4.0 0.6 1.4 -7.4 -8.3 0.9 3.2 -7.9 -7.9 -0.1 3.4 -6.7 -6.4 -0.3 3.7 -1.7 -2.4 0.7 2.9 -3.5 -3.7 0.2 General government(c) . . . . . . . . . . . . . . . . . . . . . . . . -2.9 -2.9 -4.4 -2.7 -5.3 -5.2 Abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 8.9 9.2 6.0 3.3 5.9 Memo: Non-financial private sector . . . . . . . . . . . . . . . . . . -4.1 -6.9 -4.7 -3.0 1.3 -0.8 Sources: INE and Banco de Portugal. Notes: (a) Banco de Portugal estimates derived from INE’s National Accounts from 1995 to 2003 (ESA95). (b) In 2003 and 2004, figures adjusted for direct effects of the sale of tax credits and the transfer of public enterprise reserves to the general government. For more details, see “Box 6.1 Budgetary effects of the temporary measures implemented from 2002 to 2004” . (c) General government net borrowing requirements obtained on a national accounts basis in ESA95 differ slightly from the deficit figure calculated in line with the excessive deficit procedure, given that in the latter case swap and forward rate agreements are considered as non-financial transactions, which affects interest payments. 70 Banco de Portugal| Annual Report|2004 Chapter 3 Output, expenditure and external accounts Chart 3.12 Chart 3.13 INVESTMENT, SAVINGS AND BORROWING REQUIREMENTS OF THE ECONOMY SAVINGS AND INVESTMENT (PRIVATE SECTOR AND GENERAL GOVERNMENT) (a) As a percentage of GDP As a percentage of GDP 40 30 30 Investment 0 -10 -20 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Savings 15 10 5 Current account+Capital account = borrowing requirements of the economy Investment 20 Domestic Savings Per cent Per cent 20 10 Private sector 25 General government Investment 0 Savings -5 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sources: INE and Banco de Portugal. ings rate. This translated into a decrease in the financing capacity of this sector, after the increase in 2003, despite the slight reduction in household investment, as a percentage of GDP. In parallel, there was a significant rise in borrowing requirements of non-financial corporations in 2004, after the strong decline in the previous year, which contributed significantly to the increase in external borrowing requirements of the economy. These developments were mainly due to a decrease in savings of this sector, although, as previously mentioned, corporate investment also recovered (see Supplementary Table A.3.18). The acceleration in wage costs and the increase in the tax burden have contributed to the decline in the non-financial corporations savings rate, even though low interest rate levels continued to make it possible to restrain debt-servicing costs. The decrease in non-financial corporations savings as a percentage of GDP has mainly reflected the behaviour of exporting companies, given that the results of large companies of the (8) In 2003 and 2004, figures adjusted for direct effects of the sale of tax credits and the transfer of reserves from public enterprises to the general government. For more details, see “Box 6.1 Budgetary effects of the temporary measures implemented from 2002 to 2004“ in Chapter 6 Public finances. Banco de Portugal| Annual Report|2004 Sources: INE and Banco de Portugal. Note: (a) In 2003, figures are adjusted for the direct effects of the sale of tax credits by general government. For more details, see “Box 6.1 Budgetary effects of the temporary measures implemented from 2002 to 2004”. non-tradable sector seem to have improved in 2004. In turn, general government borrowing requirements decreased only slightly, in a context where fiscal consolidation has not recorded significant progress (Chart 3.13). The widening of the Portuguese external deficit reflected to a large extent the behaviour of the trade balance, which posted a deficit of 10.8 per cent of GDP in 2004, a 1.7 p.p. increase vis-à-vis 2003 (Table 3.6). As illustrated in Chart 3.14, the widening of the trade deficit was mainly due to a very unfavourable volume effect, associated with the strong acceleration in imported volumes and lower real growth of exports. Indeed, the volume effect explains about 75 per cent of the trade balance deterioration. In 2004, there was also a loss in terms of trade, largely due to the marked increase in imported fuel prices, which explains about 20 per cent of the increase in the trade deficit. In fact, according to Banco de Portugal estimates based on data provided by INE, goods export prices increased by 0.5 per cent and import 71 Chapter 3 Output, expenditure and external accounts fuels were 0.3 and 0.7 per cent respectively, and the terms of trade loss was only 0.4 per cent. The services account surplus increased by about 0.4 p.p. of GDP in 2004, continuing to be mainly determined by the travel and tourism account. Tourism nominal receipts grew considerably, by 7.7 per cent, which reflects not only the improvement in the international tourism market, but also the hosting of the European Football Championship in Portugal. Imports of tourism services also evidenced a strong acceleration in 2004. The latter reflected the recovery of disposable income and consumer confidence, as well as some replacement of travel and tourism in Portugal by tourism services abroad, due to the effect of the appreciation of the euro on relative prices and to the diversification of the supply of package tours abroad. The income account deficit rose in 2004, as a result of the deterioration of the return in investment in shares and other equity vis-à-vis 2003(9), given that the low level of interest rates made it possible to stabilise interest payments. In 2004, the balance of emigrants/immigrants remittances, which is the main component of Chart 3.14 BREAKDOWN OF THE CHANGE IN THE GOODS ACCOUNT(a) 3000 2001 2003 2002 2004 2000 EUR million 1000 0 -1000 -2000 -3000 Total account Volume effect Price effect Terms of trade effect Note: (a) A positive (negative) change means an increase (decrease) in the goods balance. For a description of the methodology used for the breakdown of the change in the goods balance, see Banco de Portugal, Annual Report 2003, pp. 179. prices grew by 2.1 per cent, which translated into a terms of trade loss of 1.5 per cent in 2004. Changes in export and import prices excluding Table 3.6 CURRENT ACCOUNT AND CAPITAL ACCOUNT As a percentage of GDP 1999 2000 2001 2002 2003 Current account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8.5 -10.4 Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12.0 -13.0 Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 1.9 2004 -10.1 -7.6 -5.4 -7.5 -12.4 -10.5 -9.1 -10.8 2.3 2.6 2.7 3.1 of which: Travel and tourism . . . . . . . . . . . . . . . . . . . . . 2.6 2.9 3.1 3.0 2.8 3.0 Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1.5 -2.4 -3.1 -2.0 -1.2 -1.8 Current transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 3.1 3.0 2.3 2.2 2.1 of which: Emigrants’/immigrants’ remittances. . . . . . 2.8 2.8 2.7 1.9 1.5 1.4 Capital account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 1.4 1.0 1.6 2.0 1.6 -6.3 -8.9 -9.1 -6.0 -3.3 -5.9 Memo: Current account+ capital account . . . . . . . . . . . . . . . Sources: INE and Banco de Portugal. 72 Banco de Portugal| Annual Report|2004 Chapter 3 Output, expenditure and external accounts the current transfers account, continued its downward trend, standing at 1.4 per cent of GDP. Moreover, there were lower current and capital public transfers from the European Union. In particular, receipts associated with the European Regional Development Fund de- clined by almost 25 per cent, in line with expectations. As a result, the current transfers balance and, in particular, the capital account balance, declined from the previous year. (9) The income balance of direct investment in shares and other equity had improved markedly in 2003, due to abnormally high growth of receipts from dividends and profits distributed of a number of companies having their head office on Madeira’s offshore. Banco de Portugal| Annual Report|2004 73 Chapter 3 Output, expenditure and external accounts Box 3.1 SOME CONSIDERATIONS ON THE IMPACT OF THE EUROPEAN FOOTBALL CHAMPIONSHIP ON THE PORTUGUESE ECONOMY IN 2004 The preparation and hosting of the European Football Championship in Portugal affected the behaviour of economic activity, inflation and external accounts. This event seems to have had an impact on both the level and the composition of economic activity. However, the estimate of the impact of the Championship on the aggregate expenditure of the economy is very preliminary, mainly due to two factors: on the one hand, full national accounts for 2004 are not yet available and, on the other hand, since this estimate relates to a differential impact, the distinction between the factors that are independent from the Championship and those which, in full or in part, resulted from it will always be subject to different assessments. The preparation of the Championship implied that major investments were carried out or brought forward, both in the structures directly related to the Championship and in support and communication structures(1). Moreover, it is natural that part of the buoyancy of imports during the first half of the year is linked to the organisation of this event. However, imports recorded rather high growth throughout the year, rendering it more difficult to distinguish between what is independent from or directly related to the Championship. During the Championship, the greatest impact on activity was caused by the increase in demand for tourism-related services. This review focuses on the period during which the Championship took place, and therefore does not cover the impact on activity during its preparation, nor the future impact on tourism that may result from the greater international visibility of Portugal. The Championship had a significant impact on the number of foreign visitors to Portugal. In fact, data on the number of passengers that arrived at the main airports (Lisbon, Oporto and Faro) point to a year-on-year growth of 17.1 per cent in June 2004, compared with 8.5 per cent in the year as a whole. Growth of the number of visitors from countries whose national teams participated in the final stage of the Championship was 19.1 and 6.4 per cent respectively (Chart 1). This effect is also noticeable when analysing the number of nights spent by foreigners during the Championship, which grew by around 3 per cent in June, year-on-year, compared with a 1 per cent reduction in the year as a whole. The higher increase in the number of passengers that arrived in Portugal vis-à-vis the number of nights spent indicates that the visits related to the Championship were characterised by short-term stays. The increase in tourism in June had an impact on the services account. Tourism exports grew by 30.2 per cent year-on-year (7.7 per cent in 2004) (Chart 2). In addition to attracting more foreign tourists, the European Football Championship also had an impact on tourism services imports by resident families, given that in June tourism services imports had already declined by 4.1 per cent, compared with a 4.4 per cent growth in the year as a whole. Therefore, the net impact on the tourism account amounted to about €130 million(2), which is equivalent to around 0.1 per cent of GDP. Six of the foreign national teams that played in the final stage of the Championship were from countries that had adopted the euro. Naturally, their fans brought currency with them, which was subsequently used for the purchase of goods and services in Portugal. These purchases are not entered as tourism payments in the tourism account. Hence, it is possible that growth in private consumption was somewhat overestimated due to the statistical uncertainty surrounding the distinction between consumption in the (1) See “Avaliação do impacto económico do EURO2004", coordinated by Manuel Victor Martins, Instituto Superior de Economia e Gestão (2004). (2) A year-on-year rate of change in June 2004 similar to the year-on-year rate of change for the year as a whole excluding June for exports and imports (5.8 and 5.2 per cent respectively) was taken into account for the estimate. A similar estimate can be obtained by using the average of the last 7 years for the year-on-year rate of change in June. 74 Banco de Portugal| Annual Report|2004 Chapter 3 Output, expenditure and external accounts Chart 1 Chart 2 NUMBER OF PASSENGERS FROM COUNTRIES PARTICIPATING IN THE 2004 EUROPEAN FOOTBALL CHAMPIONSHIP (ARRIVALS) TRAVEL AND TOURISM ACCOUNT IN 2004 Total traffic – arrivals Year-on-year rate of change 100 500 60 200 13.020 4.087 Exports (Credits) 30 Imports (Debits) 20 15 10 5 40 20.351 34.177 2.190 28.773 8.591 0.000 300 14.161 400 35 25 Per cent 80 39.030 600 35.400 Thousands 700 120 Dif (r.h.s.) 2003 2004 Thousands 100.899 800 0 20 -5 -10 0 Jan Feb Mar Apr May Jun Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jul Aug Sep Oct Nov Dec Source: Banco de Portugal. Source: ANA— Aeroportos de Portugal, S.A. Per cent Per cent territory by residents and by non-residents. Chart 3 Moreover, in addition to the more traditional HARMONISED INDEX OF CONSUMER PRICES tourism expenditure, the purchase of tickets afYear-on-year rate of change fected consumer expenditure of resident house7.0 35 holds and expenditure by foreign football fans. Services Hotel services (r.h.s.) Assuming that this consumption was not a sub6.5 30 stitute for other leisure activities of resident 6.0 25 households, and that these amounts are not usu5.5 20 ally entered under the regular household con5.0 sumption indicators nor under the regular tour15 4.5 ism expenditure components, these should also 10 be considered as an additional impact of the 4.0 Championship on economic activity. Therefore, 5 3.5 the total revenue of the sale of tickets would cor3.0 0 respond to the maximum potential impact of this Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec expenditure component. According to data from Source: Eurostat. Euro 2004, S.A. the proceeds from the sales of tickets amounted to around €110 million. The increase in the number of visitors during this period did not have a significant impact on prices, excluding hotel prices. According to Harmonised Index of Consumer Prices (HICP) data, hotel services prices grew by 30.7 per cent in June year-on-year, with a 6.2 per cent change in the year as a whole (Chart 3). The contribution of the “hotel services” component to the 2.8 percentage points (p.p.) increase in the year-on-year change in services prices included in the HICP was 2.6 p.p. in June (3). (3) However, given that the CPI uses structure of expenditure by residents, the weight of this sub-item is much lower, and therefore its contribution is also lower (around half of the 0.5 p.p. increase in the year-on-year change in the services prices component of the CPI, recorded in June). Banco de Portugal| Annual Report|2004 75 Chapter 3 Output, expenditure and external accounts In sum, the European Football Championship had a direct impact on activity of between 0.1 and 0.2 percentage points of GDP in the year as a whole, particularly reflecting the above mentioned positive impact on the travel and tourism account. In turn, there was no significant impact on price developments, except hotel prices. Moreover, the hosting of the European Football Championship increased Portugal’s external visibility as a tourist destination, which may have positive results in the long term. 76 Banco de Portugal| Annual Report|2004 Chapter 4 Employment and wages 4 Employment and wages Developments in the Portuguese labour market in 2004 were characterised by a stabilisation in employment and an increase of the unemployment rate, in line with developments in economic activity (Table 4.1 and Charts 4.1 and 4.2). In turn, despite the increase in long-term unemployment, wages accelerated in both nominal and real terms, particularly in the private sector of the economy (Charts 4.3 and 4.4)(1). The increase in longterm unemployment seems to be partly associated with an easier access to retirement for the long-term unemployed. The growth differential of unit labour costs vis-à-vis the euro area narrowed, but remained positive. According to the Inquérito ao Emprego (Labour Force Survey) of the INE, total employment grew by 0.1 per cent in 2004, while dependent employment grew by 1.2 per cent. Therefore, the contribution of dependent employment to developments in total employment (0.9 p.p.) offset the negative contributions of self-employment (0.8 p.p.) and unpaid work (0.1 p.p.). The breakdown of employ(1) See “Box 2.5 Nominal and real wage rigidity: a microeconomic approach”. ment growth by employment status and type of employment contracts shows that the number of employees with permanent contracts grew by 2.2 per cent, while the number of employees with individual temporary contracts decreased by 1.9 per cent. The remaining types of temporary contracts declined by 3.8 per cent as a whole (Table 4.2). With regard to the composition of employment by sector of activity, in 2004 net job creation was observed in the services sector, where employment increased by 3.0 per cent, whereas a contraction of employment occurred in the remaining sectors (Chart 4.5). The positive contribution of market services and the negative contribution of manufacturing to job creation are important trends seen in the Portuguese economy in recent years. They correspond to a phenomenon of tertiarisation of the productive structure, intensified by the competitive difficulties of some industrial sectors. This job creation capacity in the services sector has contributed to limit unemployment growth. Employment growth in the construction sector shows a more volatile behaviour than in services and industry, due to the sensitivity of the former to the cyclical position of the economy. Table 4.1 POPULATION, EMPLOYMENT, UNEMPLOYMENT AND WAGES Year-on-year rate of change, per cent 2001 2002 2003 2004 Population. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Labour force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Participation rate of population aged 15-64 (per cent) . . . . . . . . . . . . . . . . . . 0.7 1.9 72.0 0.7 1.6 72.6 0.8 1.0 72.8 0.6 0.5 72.9 Total employment(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unemployment rate (per cent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term unemployment (as a percentage of total unemployment) . . . . . 1.7 4.0 40.0 0.4 5.0 37.3 -0.4 6.3 37.7 0.1 6.7 46.2 Compensation per employee in Portugal – whole economy(b) . . . . . . . . . . . Compensation per employee in Portugal – private sector(b) . . . . . . . . . . . . . Productivity per employee in Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unit labour costs in Portugal – whole economy(b) . . . . . . . . . . . . . . . . . . . . . . 5.6 5.6 0.0 5.6 3.9 3.9 0.0 3.9 2.6 1.7 -0.8 3.3 2.6 3.2 1.0 1.6 Unit labour costs in the euro area – whole economy. . . . . . . . . . . . . . . . . . . . Productivity per employee in the euro area . . . . . . . . . . . . . . . . . . . . . . . . . . . Unit labour costs in the euro area – whole economy. . . . . . . . . . . . . . . . . . . . 2.9 0.3 2.5 2.6 0.3 2.2 2.4 0.4 2.0 2.2 1.3 0.9 Sources: INE, IEFP, ECB and Banco de Portugal. Notes: (a) INE’s National Accounts for the 2001-2003 period and INE’s Labour Force Survey for 2004. (b) Compensation gross of contributions and taxes on income, adjusted for the effects of the sale of tax credits and, for the whole economy, excluding government transfers to CGA (Portuguese civil servants pension system). Banco de Portugal | Annual Report | 2004 77 Chapter 4 Employment and wages Chart 4.1 Chart 4.3 PRIVATE GDP AND PRIVATE EMPLOYMENT GROWTH UNEMPLOYMENT RATE AND CHANGES IN REAL WAGES IN THE PRIVATE SECTOR 10 1998 2.5 2.0 2000 2001 1.5 1995 1.0 1997 1999 1996 1991 2002 0.5 0.0 1994 2004 2003 1992 -0.5 -1.0 1993 -1.5 -2 0 2 4 6 1995 4 1993 2000 1999 1998 2 2001 0 2.0 3.0 4.0 5.0 6.0 2003 50 Long-term unemployment (percentage of total unemployment) 7 2004 2003 6 1997 1998 2002 1993 4 3 -2.5 8.0 TOTAL AND LONG-TERM UNEMPLOYMENT 8 5 7.0 1994 Chart 4.4 Chart 4.2 1995 1994 1996 2004 2002 Sources: INE and Banco de Portugal. Note: Series break in 1992 and 1998. OUTPUT GAP AND UNEMPLOYMENT RATE 1996 1997 Unemployment rate (per cent) Sources: INE and Banco de Portugal. Unemployment rate (per cent) 6 -4 Real change in private GDP (per cent) 1999 2001 2000 1992 0.0 2.5 Output gap (HP30, per cent) 1991 5.0 Sources: INE and Banco de Portugal. In 2004 average working hours remained constant at 39.2 hours per week. These developments contrast with those seen in 2003, when a 0.8 per cent reduction in average working hours took place. The latter was linked to the fall in economic activity and is likely to have contributed to limit the reduction in employment (Table 4.3). Currently, the effects of the legislation establishing a reduction in working hours introduced in the late 1990s seem to have dissipated. Cyclical factors and 78 1991 -2 -2.0 -5.0 1992 8 Wages in the private sector (percentage rate of change) Change in private employment (per cent) 3.0 2000 45 1999 2003 2002 35 1989 1990 1987 1996 1995 1994 1991 30 1997 1988 2001 40 1986 2004 1998 1993 25 1992 20 3 4 5 6 7 8 9 Unemployment rate in the previous year (per cent) Sources: INE and Banco de Portugal. Note: Series break in 1992 and 1998. the composition of employment by sector seem to explain developments in the average number of hours worked. In terms of the composition of employment by sector, average hours worked tend to be lower in services than in other activities, which contributes to limit growth in the number of hours worked in the economy. The share of part-time workers in total employment remained relatively low, accounting for about 11 per cent of total employment in 2004. Banco de Portugal | Annual Report | 2004 Chapter 4 Employment and wages Table 4.2 Chart 4.5 BREAKDOWN OF EMPLOYMENT BY EMPLOYMENT STATUS AND BY TYPE OF EMPLOYMENT CONTRACT CONTRIBUTIONS TO TOTAL EMPLOYMENT GROWTH BY SECTOR Rate of change, per cent 2002 2003 2004 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 -0.3 Permanent contract . . . . . . . . . . . . . . . -0.5 0.9 Other contracts(a) . . . . . . . . . . . . . . . . . 6.6 -4.3 Other dependent labour(b) . . . . . . . . . 7.7 -5.9 Self-employed . . . . . . . . . . . . . . . . . . . . . . . 1.2 -0.2 Employers . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 2.7 Unpaid family worker and others . . . . . . -9.4 -14.6 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37.5 -2.4 1.2 2.2 -0.8 -9.4 -4.5 1.1 -5.5 8.9 2.5 2.0 Services Construction Manufacturing Agriculture and fishing Total 1.8 1.5 1.0 0.5 0.5 0.1 0.0 -0.4 -0.5 Source: INE (Labour Force Survey). Notes: (a) Includes fixed-term contracts and contracts for services. (b) Includes seasonal work and occasional work. -1.0 -1.5 -2.0 2001 2002 2003 2004 Source: INE (Labour Force Survey). The evidence provided by average quarterly flows between employment, unemployment and inactivity calculated in a constant sample between consecutive quarters suggests that shifts from employment into unemployment in 2004 resulted similarly from declines in permanent and temporary contracts (Table 4.4)(2). In addition, shifts from unemployment into employment were almost equivalent to shifts into inactivity. Quarterly flows from unemployment into inactivity have been increasing in recent years, from 0.85 per cent of the labour force in 2002 to 1.14 per cent in 2004. Con- (2) These flows are calculated on the basis of a fixed sample resulting from Labour Force Survey rotations in two consecutive quarters. versely, flows from inactivity into unemployment accounted for 1.15 per cent of the labour force in 2004, i.e. a lower value than that observed in the previous year. Net flows from inactivity into employment have been negative since 2002, in line with the pro-cyclical behaviour of this variable. This would imply a decline in the participation rate, particularly in groups that are less attached to the labour market, i.e. women, but especially youth (aged 15 to 24 years), whose participation rate dropped from 45.1 per cent in 2003 to 43.7 per cent in 2004. However, demographic factors, reflected in the declining share of youth in total population, contributed to a further increase in the overall participation rate in Table 4.3 EMPLOYMENT, HOURS WORKED AND AVERAGE WORKING HOURS Year-on-year rates of change, per cent Total employment(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working hours(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average working hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average working hours (number of hours). . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share of part-time workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1999 2000 2001 2002 2003 2004 1.9 0.7 -1.1 39.9 11.0 1.7 1.2 -0.6 39.7 10.9 1.7 1.2 -0.6 39.4 11.1 0.4 0.5 0.1 39.5 11.3 -0.4 -1.2 -0.8 39.2 11.7 0.1 0.1 0.0 39.2 11.3 Source: INE. Notes: (a) INE’s National Accounts for the 1999-2003 period and INE’s Labour Force Survey for 2004. (b) Usual number of hours. Banco de Portugal | Annual Report | 2004 79 Table 4.4 QUARTERLY AVERAGE INFLOWS AND OUTFLOWS BETWEEN LABOUR MARKET STATES (a) As a percentage of the labour force 2002 2003 Q1 Q2 Q3 Q4 Employment – Inactivity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inactivity – Employment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.26 1.34 1.48 1.35 1.33 1.45 2.65 2.11 Inflows into unemployment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.68 1.70 2.11 Employment – Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Permanent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.81 0.27 0.36 0.17 0.79 0.27 0.28 0.24 Inactivity – Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.87 Outflows into unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average 2004 Q1 Q2 Q3 Q4 1.68 1.56 1.74 1.61 1.57 1.35 1.32 1.35 1.43 1.23 2.89 2.09 2.61 2.07 2.32 0.93 0.24 0.43 0.26 1.45 0.48 0.61 0.36 1.00 0.32 0.42 0.26 1.31 0.54 0.53 0.24 1.00 0.47 0.35 0.17 0.91 1.18 1.44 1.10 1.30 1.60 1.79 1.73 2.24 1.84 Unemployment – Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Permanent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.92 0.15 0.35 0.42 0.96 0.12 0.54 0.30 0.94 0.11 0.51 0.32 1.15 0.23 0.63 0.29 Unemployment – Inactivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.68 0.83 0.79 Net inflows into unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.08 -0.09 0.39 Average Q1 Q2 Q3 Q4 Average 1.51 1.39 1.61 1.35 1.10 1.08 1.27 1.20 1.16 1.17 1.29 1.20 2.54 2.39 1.96 1.94 2.28 2.29 2.12 0.99 0.36 0.40 0.23 1.15 0.41 0.52 0.22 1.11 0.45 0.45 0.22 0.96 0.31 0.37 0.28 0.83 0.34 0.28 0.21 0.91 0.34 0.38 0.19 1.16 0.40 0.52 0.23 0.97 0.35 0.39 0.23 1.07 1.33 1.38 1.27 1.00 1.10 1.37 1.13 1.15 2.27 2.45 2.24 2.26 2.31 2.34 2.47 1.98 2.25 2.26 0.99 0.15 0.51 0.33 1.06 0.17 0.60 0.29 1.47 0.24 0.79 0.44 1.14 0.11 0.64 0.40 1.18 0.21 0.60 0.37 1.22 0.18 0.66 0.37 1.20 0.21 0.61 0.38 1.33 0.18 0.77 0.38 0.89 0.14 0.52 0.22 1.08 0.14 0.56 0.38 1.12 0.17 0.62 0.34 1.09 0.85 1.21 0.98 1.09 1.08 1.09 1.14 1.14 1.09 1.17 1.14 0.65 0.26 0.34 -0.38 0.08 0.28 0.08 -0.38 -0.53 0.30 0.04 -0.14 Flows between employment and inactivity Sources: INE (Labour Force Survey) and Banco de Portugal. Note: (a) Considering the common sample component of quarter t and quarter t-1, and using the population weights of quarter t. Chapter 4 Employment and wages 2004. This trend has been reinforced by the structural increase in the female participation rate (4.8 p.p. for the 15-64 age group from 1998 to 2004). As a result, the participation rate for those aged between 15 and 64 years rose by 0.1 p.p. in 2004, to stand at the annual average value of 72.9 per cent. This stabilisation reflected a further decline in the male participation rate (0.4 p.p. less), offset by a rise in the female participation rate (0.5 p.p. more). The average unemployment rate was 6.7 per cent in 2004, i.e. a 0.4 p.p. increase from the average value in 2003. The unemployment rate remained therefore above the estimates available for the natural rate of unemployment(3), a behaviour that is globally consistent with developments in the cyclical position of the Portuguese economy (Chart 4.2). The rise in unemployment concentrated in the second half of the year and affected both men and women equally. The increase of youth unemployment should also be mentioned, with the unemployment rate in this age group reaching 15.3 per cent in 2004 (Table 4.5). The expiry of the fixed-term contract continues to prevail as the main reason for job search, although decreasing in comparison with previous years (3.8 p.p. less since 2001). By contrast, individual dismissal and collective dismissal / firm closure have been gaining (3) The natural rate of unemployment is compatible with non-accelerating prices (NAIRU). According to Dias, F., Esteves, P. and Félix, R. (2004) in “Revisiting the NAIRU estimates for the Portuguese economy”, Economic Bulletin of the Banco de Portugal, June, the NAIRU for Portugal is set at around 5.5 per cent. importance in the unemployed structure (27.9 per cent in 2001 to 36.8 in 2004) (Table 4.6). These developments have to be considered jointly with the increase in long-term unemployment that may have negative reflections on future developments in the Portuguese unemployment rate. In fact, the average unemployment duration in 2004 increased rather sharply from the previous year, reaching an average value of 19.7 months. In turn, long-term unemployment, which measures the share of unemployed for more than one year increased by 8.5 p.p. from the previous year, to stand at 46.2 per cent (Table 4.7), which is a higher value than that seen in the same stage of the previous business cycle (Chart 4.4). This may be associated with the changes introduced in 2003 in the unemployment benefit system, which facilitated access to these benefits and created a monetary incentive to long-term unemployment in the period preceding retirement. This increase of long-term unemployment also partly results from the depreciation and inadequacy of the professional expertise of the unemployed as regards new job offers, a factor which is especially relevant in a population with a low average education level. In 2004 the number of people receiving unemployment benefits grew more than the number of unemployed in the Labour Force Survey (Chart 4.6). The universe of unemployment benefit recipients does not coincide with that of the unemployed identified by the Labour Force Survey, either because the latter may not fulfil the eligibility criteria, or because the maximum period for the granting of unem- Table 4.5 YOUTH UNEMPLOYMENT RATE BY LEVEL OF EDUCATION (AGED 15-24) Per cent 2001 2002 2003 2004 Structure Youth unemployment rate . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 11.6 14.5 15.3 100.0 Education level Basic schooling 1st and 2nd levels . . . . . . . . . . . . . . . . . . . . Basic schooling 3rd level . . . . . . . . . . . . . . . . . . . . . . . . . . . . Secondary schooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . College-level schooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 9.9 9.3 13.4 11.2 11.4 9.8 17.3 13.5 13.4 14.2 23.8 17.6 13.4 13.5 20.5 34.2 35.8 19.3 9.5 Source: INE (Employment Survey). Banco de Portugal | Annual Report | 2004 81 Chapter 4 Employment and wages Table 4.6 BREAKDOWN OF THE STOCK OF EMPLOYED PERSONS BY REASONS FOR JOB SEEKING Per cent Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First-job seekers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Collective dismissal and firm closure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Individual dismissal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . End of a fixed-term contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . End of contract by mutual agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other reasons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 2002 2003 2004 100.0 16.0 13.9 14.0 27.9 8.5 19.7 100.0 15.2 12.7 16.0 27.7 8.8 19.6 100.0 13.5 13.0 19.6 26.1 9.9 17.9 100.0 13.4 16.8 20.0 24.1 10.9 14.8 Source: INE (Employment Survey). Table 4.7 LABOUR MOBILITY 1998 Employed Average tenure in the job (months). . . . . . . . . . . . . . . . . . . . . . . . . 117.7 Rate of change (per cent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term employment(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44.6 Change (percentage points) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unemployed Average tenure out a job (months) . . . . . . . . . . . . . . . . . . . . . . . . . 21.9 Rate of change (per cent) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1999 2000 2001 2002 2003 2004 118.9 1.1 45.2 0.6 117.8 -0.9 45.3 0.1 116.8 -0.9 44.6 -0.7 117.8 0.9 44.9 0.2 121.4 3.1 44.9 0.0 124.6 2.6 45.5 0.6 19.4 -11.2 20.6 6.1 18.2 -11.8 17.6 -3.2 16.2 -8.3 19.7 22.1 Sources: INE (Employment Survey) and Banco de Portugal. Note: (a) Share of employees aged 45 or over whose job tenure is equal to 20 years or over. ployment benefits may have already expired. However, developments in these indicators in 2004 show a significant increase in the unemployment benefit coverage rate, possibly related to the above-mentioned changes introduced in 2003 in eligibility conditions. This, together with the increase in unemployment associated with cyclical developments in economic activity, has contributed to very high growth in expenditure on unemployment benefits, i.e. from 0.7 per cent of GDP in 2002 to 1.2 per cent in 2004. Differences in unemployment rates across regions make it possible to assess the existence of spatial mismatches associated with frictions in the labour market. In 2004 the unemployment rate increased more in regions that already recorded higher unemployment, namely Alentejo and the North (Chart 4.7). According to Banco de Portugal estimates, compensation per employee for the total econ- 82 omy grew by 2.6 per cent in 2004, i.e. similarly to the previous year(4). However, real wages increased by 0.2 per cent, which accounts for a 0.8 p.p. increase from the previous year. Wages in the private sector grew by 3.2 per cent in nominal terms, a 1.5 p.p. increase from 2003. Developments in real terms are even more marked, with a 2.1 p.p. acceleration of compensation per employee from 2003. Average negotiated wages in the private sector grew by 2.9 per cent in nominal terms in 2004. However, given the difficulties in the completion of bargaining processes, the number of workers covered by these regulations was much lower than usual, with a consequent re- (4) Average compensation per employee, gross of contributions and income taxes, adjusted for the effects of the sale of tax credits. Social contributions used in the calculation of compensation per employee do not include government transfers to CGA. Banco de Portugal | Annual Report | 2004 Chapter 4 Employment and wages Chart 4.6 Chart 4.7 DEVELOPMENTS IN TOTAL UNEMPLOYMENT, REGISTERED AND SUBSIDISED UNEMPLOYMENT RATE BY REGIONS Rate of change 12 8 20 Per cent 2002 2004 10 Per cent 30 Unemployment Subsidised unemployment Registered unemployment 2001 2003 6 10 4 0 2 -10 0 Algarve Alentejo Lisbon and Tagus' Valley -20 Center North Azores Madeira Portugal -30 1998 1999 2000 2001 2002 2003 2004 Sources: INE (Labour Force Survey), IEFP and Instituto de Informática e Estatística da Segurança Social. duction in the usefulness of this wage scale growth indicator. Compensation per employee in general government grew by 1.4 per cent in 2004 (excluding government transfers to Caixa Geral de Aposentações (CGA), the civil servants pension system). This, considering the average update of 0.6 per cent in the wage scale, corresponds to a wage drift of 0.8 p.p. Productivity per employee, a variable that tends to show a pro-cyclical behaviour, grew by 1.0 per cent in 2004, reversing the 2003 fall (Chart 4.8). Developments in productivity per hour worked were similar to those in productivity per employee and were associated with the stabilisation of the average number of hours worked in 2004. The differential between real wages and productivity was negative (-0.9 p.p.), after having been systematically positive since 1997 (Chart 4.9). Unit labour costs (ULC) for the total economy grew by 1.6 per cent in 2004, i.e. 1.7 p.p. less than in 2003. However, the deceleration in ULC was much more subdued in the private sector of the economy, reflecting higher wage growth in this sector. Based on the information available, the ULC differential vis-à-vis the Banco de Portugal | Annual Report | 2004 Source: INE (Labour Force Survey). euro area is estimated to stand at around 0.7 p.p. in 2004, i.e. 0.6 p.p. less than in 2003. The continued increase of relative unit labour costs reflects both continued higher wage growth and unfavourable productivity developments in Portugal (see Section 2.3 Competitiveness and structural policies). 83 Chapter 4 Employment and wages Chart 4.8 Chart 4.9 UNIT LABOUR COSTS DIFFERENTIAL BETWEEN REAL WAGE AND PRODUCTIVITY GROWTH Rate of change in whole economy (excluding transfers from the State to CGA) Whole economy Compensation per employee Productivity Unit labour costs 7 8 6 6 Percentage points 5 Per cent 4 3 2 1 0 2 0 -2 -1 -2 1999 2000 2001 2002 Sources: INE and Banco de Portugal. 84 4 2003 2004 -4 1988 1990 1992 1994 1996 1998 2000 2002 2004 Sources: INE and Banco de Portugal. Note: A positive (negative) figure means that real wages increase more (less) than productivity. Banco de Portugal | Annual Report | 2004 Chapter 5 Prices 5 Prices Chart 5.1 CONSUMER PRICE INDEX Year-on-year and average rates of change 6 5 4.4 4 Per cent Annual average inflation, as measured by the Consumer Price Index (CPI), stood at 2.4 per cent, compared with 3.3 per cent in the previous year (Table 5.1). The decline in average inflation, however, reflected the strong deceleration in prices during 2003, against the background of contracting domestic demand, significant wage deceleration and sharp appreciation of the euro. During 2004, in fact, the inflation rate remained broadly stable around the levels recorded at the end of the previous year (Chart 5.1). The interruption in the downward trend of the inflation rate reflected the acceleration of domestic demand and higher wage increases, which have contributed to maintaining the high growth pace of prices in the services sector. By contrast, prices of goods maintained low growth rates during 2004. The decline in relative prices of imports of consumer goods over recent years, associated with the increase in the real import penetration rate, contributed to contain pressures on prices of goods, despite the strong increase in international oil prices. During 2004, the year-on-year rate of change of the CPI stood in general at, or below, 2.5 per cent (except in June and July), thereby 3 3.6 3.3 2.9 2.4 2.3 2 Year-on-year rate of change Annual average rate of change 1 0 1999 2000 2001 2002 2003 2004 Source: INE. Note: Up to December 2002, rates of change were calculated using the 1997-based CPI. From January 2003 onwards, rates of change are calculated using the new 2002-based CPI. discontinuing the strong downward trend of the year-on-year inflation observed in the previous year. Unprocessed food and energy, the most volatile components of the CPI, showed contrasting developments that were eventually offset in the year as a whole, similarly to Table 5.1 CPI – MAIN AGGREGATES(a) Average rates of change, per cent Weights in 2004 1999 2000 2001 2002 2003 2004 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total excluding unprocessed food and energy . . . . . . . . . . . . . . . . . 100 79.8 2.3 2.7 2.9 2.5 4.4 3.6 3.6 4.4 3.3 3.2 2.4 2.4 Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unprocessed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Processed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-energy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65.3 22.8 11.8 11.0 42.5 34.1 8.4 34.7 1.7 2.7 2.7 2.8 1.1 1.8 -1.9 3.7 2.2 1.9 2.5 1.4 2.4 1.4 6.1 4.2 4.2 6.1 8.8 3.1 3.1 2.5 5.2 4.8 2.4 1.9 0.3 3.8 2.7 3.1 1.2 6.0 2.7 2.9 2.6 3.1 2.6 2.0 4.9 4.5 1.6 1.4 0.0 2.9 1.7 0.8 5.4 3.8 Sources: INE and Banco de Portugal. Note: (a) Up to December 2002, the rates of change were calculated using the 1997-based CPI. From January 2003 onwards, the rates of change are calculated using the new 2002-based CPI. Banco de Portugal | Annual Report | 2004 85 Chapter 5 Prices 86 Chart 5.2 CPI – NON-ENERGY INDUSTRIAL GOODS AND SERVICES Year-on-year rates of change 8 7 Differential (p.p.) Non-energy industrial goods Services 6 5 Per cent developments in the euro area. Therefore, the CPI excluding these components grew, on average, at a similar rate as the total index. Energy prices showed a virtually continuous acceleration from March onwards, in line with the increase in international oil prices, which led to an annual average inflation rate of 5.4 per cent. In contrast, unprocessed food prices posted very small changes in the course of the year, with negative year-on-year rates of change from August onwards. This behaviour was reflected in a nil annual average change in 2004. Prices of non-energy industrial goods showed very low rates of change during the year, increasing on average by 0.8 per cent. In contrast, prices of services continued to show high growth rates, with an average increase of 3.8 per cent in 2004. The average growth differential between prices of both aggregates stood at 3.0 percentage points (p.p.), corresponding to an increase of 0.5 p.p. vis-à-vis the figure observed in 2003. The inflation differential between non-energy industrial goods and services was particularly high during the summer months due to temporary effects affecting both aggregates (Chart 5.2). On the one hand, the European Football Championship in June and early July translated into a rather significant but one-off increase in the prices of some services that are more sensitive to demand by non-residents, especially hotels (see “Box 3.1 Some considerations on the impact of the European Football Championship on the Portuguese economy in 2004"). On the other hand, prices of non-energy industrial goods decelerated markedly in July and August, reflecting a more significant sales and promotions effect than in the previous year. Domestic conditions in the Portuguese economy contributed to the interruption in the downward trend of inflation and to the widening of the differential between goods and services inflation in 2004. According to the estimates of Banco de Portugal, nominal wages per worker in the private sector increased by 3.2 per cent in 2004, after 1.7 per cent growth in the previous year. The cyclical recovery in productivity, however, prevented wage accelera- 4 3 2 1 0 1999 2000 2001 2002 2003 2004 Source: INE. Note: Up to December 2002, rates of change were calculated using the 1997-based CPI. From January 2003 onwards, rates of change are calculated using the new 2002-based CPI. tion to translate into higher growth in unit labour costs (Table 5.2). In parallel, and despite low growth in economic activity, domestic demand accelerated, in particular private consumption that showed a clearly higher growth than GDP. Similarly to developments in the second half of the 1990s, this acceleration in private consumption led to an increase in the real import penetration rate and, therefore, there were no significant pressures on goods prices. In services, less prone to be replaced by imports and for which wage costs are more relevant, price increases continued to be high. The lower degree of competition in some sub-sectors in services also tends to facilitate the transmission of costs increases to the respective final prices. In a small open economy, the exchange rate and international prices, in tandem with domestic conditions, are important variables behind the behaviour of inflation, in particular as regards tradable goods. In the specific case of the Portuguese economy, participation in the euro area and the importance of trade with the Banco de Portugal | Annual Report | 2004 Chapter 5 Prices Table 5.2 PORTUGAL – MAIN PRICE AND COST INDICATORS Average rates of change, per cent 1999 2000 2001 2002 2003 2004 Consumer price index CPI – Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HICP – Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 2.2 2.9 2.8 4.4 4.4 3.6 3.7 3.3 3.3 2.4 2.5 Unit labour costs(a) Whole economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 2.6 4.9 4.3 5.6 5.6 3.9 3.9 3.3 2.5 1.6 2.2 Import prices of goods(b) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total excluding fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0.6 -2.0 0.5 9.4 5.0 4.0 -0.3 0.5 3.4 -2.5 -2.0 -1.9 -2.2 -2.9 -2.9 2.1 0.7 -1.7 International commodity prices Oil prices (Brent), EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-energy commodity prices, EUR . . . . . . . . . . . . . . . . . . . . . . 41.0 -6.4 83.0 20.4 -9.8 -8.0 -4.9 -0.9 -5.0 -4.6 21.4 10.8 Exchange rates Nominal effective exchange rate index for Portugal(c) . . . . . . . -1.2 -2.3 0.3 0.6 2.6 0.6 Sources: Eurostat, Thomson Financial Datastream, HWWA, INE and Banco de Portugal. Notes: (a) Compensation excluding government transfers to Caixa Geral de Aposentações – CGA (Portuguese civil servants’ pension system). In 2003, figures adjusted for directs effects of the sale of tax credits by the general government. For more details, see “Box 6.1 Budgetary effects of temporary measures implemented from 2002 to 2004 in Chapter 6 Public finances. (b) Banco de Portugal calculations based on information provided by INE. The classification by broad economic categories shown in this table differs from that used by INE, given that light passenger vehicles are included in consumer goods rather than equipment goods. (c) A positive change corresponds to an appreciation of the index. Calculations against a group of 13 trading partners up to 1999; from 1999 onwards, calculations against a group of 22 trading partners. For a detailed description of the methodology, see Gouveia, A.C. and Coimbra, C. (2004) “New effective exchange rate index for the Portuguese economy” Economic Bulletin of Banco de Portugal, December. other euro area economies imply that imported inflation is chiefly determined by the behaviour of prices in the euro area as a whole, as well as by the exchange rate developments of the euro. In 2004, average inflation in the euro area remained around 2 per cent, reflecting the policy pursued by the European Central Bank of maintaining price stability. The exchange rate developments of the euro, which translate into a significant accumulated appreciation in the last three years, continued to have also a favourable effect on the behaviour of inflation in Portugal. The moderating effect of import prices was, however, less pronounced than in 2003, due to the strong growth in international oil prices and non-energy commodity prices. The estimates of Banco de Portugal, based on information made available by INE, point to an increase of 2.1 per cent in prices of imported Banco de Portugal | Annual Report | 2004 goods, after the declines observed between 2001 and 2003. The transmission of the significant increase in international oil prices to the other prices was, however, relatively limited, since the change in import prices excluding fuels was 0.7 per cent. In addition, prices of imported consumer goods decreased in 2004 for the third consecutive year, due to the appreciation of the euro and to the gradual increase in international competition in these products. The latter is related to the entry in world markets of the economies of emerging markets and developing countries. In effect, the behaviour of non-energy industrial prices in Portugal seems to be largely associated with this trend of import prices of consumer goods. In addition, the gradual improvement in the distribution and trading channels over recent years, and the existence of very competitive market structures in this type of goods, also seem to 87 Chapter 5 Prices Chart 5.3 HARMONISED INDEX OF CONSUMER PRICES Year-on-year rates of change in per cent and differentials vis-à-vis the euro area Total Differential Portugal Goods Differential Euro area 10 10 8 8 6 6 4 4 2 2 0 0 -2 1999 2000 2001 2002 2003 -2 2004 1999 Portugal 2000 2001 Services Differential Portugal Euro area Differential 10 8 8 6 6 4 4 2 2 0 0 1999 2000 2001 2002 2003 2004 -2 1999 Portugal 2003 2004 Portugal 2000 2001 Euro area 2002 2003 2004 Energy industrial goods Non-energy industrial goods Differential 2002 Food 10 -2 Euro area Differential Euro area Portugal Euro area 20 10 15 8 10 6 5 0 4 -5 2 -10 0 -2 -15 1999 2000 2001 2002 2003 2004 -20 1999 2000 2001 2002 2003 2004 Source: Eurostat. have contributed to contain price pressures. The trend of prices of non-energy industrial goods in Portugal was very similar to that observed in the euro area, where a number of 88 countries even had negative changes in the consumer prices of these products. In 2004, the inflation differential vis-à-vis the euro area stood at a level similar to that ob- Banco de Portugal | Annual Report | 2004 Chapter 5 Prices Chart 5.4 UNIT LABOUR COSTS IN PORTUGAL AND IN THE EURO AREA Rates of change and differential Differential (p.p.) Portugal (a) Euro area 6 5 4 Per cent served at the end of the previous year (Chart 5.3). The decline in the average inflation rate in Portugal, however, translated into a corresponding narrowing of the annual differential, since price growth in the euro area remained stable from the previous year. Considering the annual average change in the HICP, the inflation differential narrowed from 1.2 to 0.4 p.p. in 2004. The inflation differential in goods was virtually nil during the year, reaching even negative figures in some months. This was partly the result of the trend of prices in “clothing and footwear” in Portugal, that was rather influenced by the significant effect of sales and promotions in the summer months. In addition, food prices showed also a more marked deceleration in Portugal than in the euro area. In services, the differential of approximately 1 p.p. in price growth was similar to that observed at the end of 2003. The differential in services prices was affected in June by the significant increase in hotel prices(1). In 2004, Portugal recorded the highest growth in services prices amongst the euro area countries. This is particularly striking given that services prices in the euro area were strongly affected by temporary factors associated with the sharp increase in health services prices. In fact, the inflation differential in the services sector has been very high, largely reflecting wage cost increases that have been systematically higher in Portugal than in the euro area as a whole (Chart 5.4). 3 2 1 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sources: ECB, INE and Banco de Portugal. Note: (a) Compensation excluding government transfers to the Caixa Geral de Aposentações – CGA (Portuguese civil servants’ pension system). In 2003, figures adjusted for directs effects of the sale tax credits by the general government. (1) In view of the higher weight of hotel services in the HICP, the impact of the temporary increase in these prices as a result of the European Football Championship was stronger in the services aggregate of the HICP than of the CPI. Banco de Portugal | Annual Report | 2004 89 Chapter 6 Public finances 6 Public finances(1) Chart 6.1 6.1 Overview GENERAL GOVERNMENT OVERALL BALANCE AND CHANGE IN THE UNDERLYING FISCAL POSITION 2 Change in the underlying fiscal position (p.p.) (a) Overall balance (including temporary measures) Overall balance (excluding temporary measures) 0.9 1 As a percentage of GDP In 2004, progress in fiscal consolidation was limited, despite the need to correct the significant structural imbalance in public accounts. The slight improvement in the underlying fiscal position - assessed on the basis of the change in the primary balance adjusted for the cycle and temporary measures as a percentage of GDP - relied on the increase in tax revenue, as expenditure on pensions continued to grow strongly. In turn, the debt ratio pursued the upward trend started in 2001. 0.2 0 -1 -0.1 -0.9 -2 -3 -3.2 -0.8 -2.8 -0.9 -2.7 -2.8 -3.2 -4 -1.0 (1) The general government accounts used in the elaboration of this chapter are those underlying the February 2005 excessive deficit procedure notification. They are compiled on a National Accounts basis, according to the methodology of the European System of Accounts (ESA95), except as regards the treatment of swap and forward rate agreements, which are considered as non-financial transactions and, as such, have an impact on interest payments and on the deficit. In 2004 the net effect of these transactions reduced interest payments by €32.5 million. Statistics on general government debt follow the ESA95 methodology as regards the delimitation of general government and the definition of financial instruments. However, debt valuation is recorded at nominal value, instead of market value. GDP values used in the calculation of ratios are the estimates of Banco de Portugal presented in Chapter 3 Output, expenditure and external accounts. (2) Figure reported in the February 2005 excessive deficit procedure notification. Eurostat validated data submitted by the Portuguese authorities in the usual press release, disclosed on 18 March 2005, which summarised data regarding previous years resulting from notifications of all Member States. However, Eurostat noted that an assessment was underway of the consistency between data on a cash basis and on an accrual basis made available by Portugal, which might lead to a subsequent data revision. Banco de Portugal | Annual Report | 2004 -2.9 -4.4 -4.1 -5 -5.4 -6 The general government deficit, on a National Accounts basis, stood at 2.9 per cent of GDP in 2004, unchanged from the previous year(2) (Chart 6.1 and Table 6.1). Similarly to 2002 and 2003, keeping the deficit below the 3 per cent reference value in 2004 implied recourse to sizeable temporary measures, amounting to 2.3 per cent of GDP (1.4 and 2.5 per cent of GDP in 2002 and 2003 respectively) (see “Box 6.1 Budgetary effects of the temporary -2.9 1998 1999 2000 2001 2002 2003 -5.2 2004 Sources: INE, Ministério das Finanças and Banco de Portugal. Note: (a) The change in the underlying fiscal position is measured by the change in the cyclically adjusted primary balance, also adjusted for the effects of temporary measures, as a percentage of GDP. A positive figure indicates an improvement in the underlying fiscal position and a negative figure indicates a deterioration of this position. measures implemented from 2002 to 2004”). This resulted from several transfers by state-owned corporations to Caixa Geral de Aposentações (CGA), in exchange for the payment of future outlays with pensions of employees covered by the corresponding pension funds, which were recorded as capital revenue in the general government account(3). Therefore, the general government deficit excluding temporary measures stood at 5.2 per cent of GDP, showing a decrease of 0.2 percentage points (p.p.) vis-à-vis 2003. The cyclically-adjusted deficit, also adjusted for temporary measures, stood at 4.2 per cent of GDP in 2004. (3) More specifically, they correspond to transfers from Caixa Geral de Depósitos (1.9 per cent of GDP), Navegação Aérea de Portugal (0.2 per cent of GDP), Aeroportos de Portugal (0.1 per cent of GDP) and Imprensa Nacional Casa da Moeda (0.1 per cent of GDP). 91 Chapter 6 Public finances Table 6.1 MAIN FISCAL INDICATORS As a percentage of GDP Overall balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Primary balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effects of temporary measures(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overall balance adjusted for temporary measures(a) . . . . . . . . . . . . . . . . Overall balance adjusted for the cycle and temporary measures(a)(b) . . Primary balance adjusted for the cycle and temporary measures(a)(b) . Public debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2000 2001 2002 2003 2004 -2.8 0.4 0.3 -3.2 -4.6 -1.4 53.3 -4.4 -1.2 0.0 -4.4 -5.6 -2.4 55.9 -2.7 0.3 1.4 -4.1 -4.6 -1.6 58.5 -2.9 0.0 2.5 -5.4 -4.5 -1.6 60.0 -2.9 -0.1 2.3 -5.2 -4.2 -1.4 61.8 Sources: INE, Ministério das Finanças and Banco de Portugal. Notes: (a) The amounts of temporary measures considered only take into account direct effects on general government accounts of the several operations carried out in each year (see “Box 6.1 Budgetary effects of the temporary measures implemented from 2002 to 2004”). (b) For a description of the methodology used, see Neves and Sarmento (2001) “The use of cyclically adjusted balances at Banco de Portugal”, Economic Bulletin of Banco de Portugal, September. The cyclical component of the fiscal balance decreased very slightly in 2004. Indeed, even though the real GDP growth rate increased significantly compared with the previous year, the growth of economic activity remained below trend. Therefore, the output gap and, consequently, the cyclical component of the fiscal balance became more negative in 2004. The cyclically adjusted primary balance, also adjusted for the effects of temporary measures, increased by around 0.2 p.p. of GDP. The improvement in the underlying fiscal position in 2004, albeit negligible, was mainly the result of an exceptionally favourable behaviour of tax revenue, in particular corporate income taxes, whose contribution to the improvement in the fiscal position stood at around 0.5 p.p. of GDP, as well as of the containment in the growth of compensation of employees, which allowed a decrease of 0.3 p.p. in the ratio of this item to GDP. These two effects were countered by the strong increase in expenditure on pensions, both of the private sector system and of the civil servants’ system, which accounted for an increase in expenditure of 0.6 p.p. of GDP (Chart 6.2). The debt ratio reached 61.8 per cent at the end of 2004, i.e. 1.8 p.p. up from a year earlier. The upward trend started in 2001 continued, even though the primary balance, including 92 the effects of temporary measures, was virtually nil. Indeed, developments in the debt ratio in 2004 resulted from both the effect of the positive differential between the implicit interest rate on public debt and the growth rate of nominal GDP and from sizeable deficit-debt adjustments. In October 2004, Standard & Poors announced a negative outlook on the sovereign rating of the Portuguese Republic. The significant growth in primary expenditure and the large recourse to temporary measures to contain government deficit growth in the past few years were behind this assessment. 6.2 Current revenue(4) Developments in current revenue have contributed by around 0.8 p.p. of GDP to the improvement in the underlying fiscal position in 2004 (Table 6.2). Indeed, when adjusting tax revenue for the impact of the economic cycle and temporary measures, and excluding some items that simultaneously affect revenue and expenditure, corporate income taxes showed (4) The analysis presented in Sections 6.2 Current revenue, 6.3 Current expenditure and 6.4 Capital revenue and expenditure do not include the effects of temporary measures. References to cyclically adjusted figures are highlighted. Banco de Portugal | Annual Report | 2004 Chapter 6 Public finances Chart 6.2 CHANGE IN CYCLICALLY ADJUSTED REVENUE AND PRIMARY EXPENDITURE Change in the ciclically adjusted primary expenditure, as a percentage of GDP Excluding temporary measures 3.0 Deterioration of the underlying fiscal position (a) 2.5 2.0 1.5 1.0 2001 -2.0 2000 0.5 1998 1997 0.0 -1.0 0.0 -0.5 1994-1.0 1991 1993 1996 1999 2003 2004 2002 1.0 Improvement 1992 in the underlying fiscal position (a) 2.0 3.0 4.0 1995 Change in the cyclically adjusted revenue, as a percentage of GDP Sources: INE, Ministério das Finanças and Banco de Portugal. Note: (a) The deterioration (improvement) of the underlying fiscal position corresponds to a negative (positive) change in the cyclically adjusted primary balance, also adjusted for the effects of temporary measures, as a percentage of GDP. an exceptionally favourable behaviour. Most of the other current revenue items made positive contributions, albeit very small, to the deficit decrease. Current revenue accelerated strongly in 2004, resulting in an increase of 1.3 p.p. of GDP. These developments can be mainly explained by a very significant rise in tax revenue (around 1.0 p.p. of GDP), which, as previously mentioned, did not result essentially from the recovery in economic activity, and was mostly related to corporate income taxes and social contributions of the civil servants’ pension system. In 2004 taxes on income and wealth rose by 0.5 p.p. of GDP. The 4.3 per cent increase in household income taxes stood above wage bill growth, net of employers’ social contributions. This behaviour can be explained by the progressivity of the Personal Income Tax, as well as by an exceptional amount of tax assessments issued by the tax administration, which accounted for an increase in revenue at the end Banco de Portugal | Annual Report | 2004 of 2004. Corporate Income Tax receipts expanded strongly in 2004 (19.0 per cent), mainly due to four factors. Firstly, suspensions of the last prepayment of the year were negligible, despite the cut in the corporate income tax rate from 30 to 25 per cent included in the State Budget for 2004. Therefore, the full effect of the cut in this rate will only be reflected in 2005 revenue, via tax adjustments relating to the 2004 income. Secondly, in 2004 net payments relating to the 2003 exercise showed a favourable result. Thirdly, the collection of special prepayments increased significantly, due to the fact that part of the last special prepayment relating to 2003 was only paid in 2004. Finally, there was some effect of the exceptional amount of tax assessments issued by the tax administration in the second half of the year, similarly to that seen in the personal income tax. With regard to social contributions, the 0.4 p.p. of GDP change was due to the behaviour of actual social contributions of the civil servants system, which resulted from the 22.2 per cent increase in State transfers to the CGA(5). These developments mainly reflected the strong growth of expenditure on pensions, as well as the more limited use of financial operations to guarantee the system’s balance. In 2003, the CGA expenditure was higher than its revenue by around €230 million, but in 2004 the system was again balanced. As a result, the use of alternative sources of financing in 2003 allowed the decrease of the state subsidy to CGA in that year, affecting the 2003 and 2004 rates of change by around -10 p.p. and +10 p.p., respectively. The actual social contributions of the private sector system increased by 4.4 per cent, which is apparently consistent with developments in the private sector wage bill. (5) State transfers to CGA are aimed at ensuring the financial balance of the civil servants’ pension system. When the CGA does not receive extraordinary proceeds, these transfers are approximately equivalent to the difference between expenditure on social payments (mostly pensions) and social contributions (of civil servants and others). In general government accounts, State transfers to CGA are simultaneously recorded as social contributions revenue and compensation of employees. 93 Chapter 6 Public finances Table 6.2 GENERAL GOVERNMENT CURRENT REVENUE (excluding temporary measures) Structure as a percentage of GDP Growth rates per cent Contribution to the underlying fiscal position in 2004(b) (percentage points) 2003 2004 2003(a) 2004 40.3 36.1 8.7 5.8 3.0 12.5 11.5 7.9 3.6 1.1 14.8 41.6 37.1 9.2 5.8 3.4 12.9 11.9 7.9 3.9 1.1 15.0 1.6 1.7 -4.3 1.4 -13.7 5.0 3.6 1.4 8.8 21.7 2.7 6.8 6.5 9.3 4.3 19.0 6.8 7.2 4.4 13.3 2.4 4.7 0.8 0.7 0.5 0.1 0.5 0.1 0.1 0.1 0.0 0.1 8.2 2.4 0.8 2.4 1.8 8.3 2.3 0.8 2.4 2.0 3.4 6.2 -14.4 11.2 -9.6 4.7 0.6 14.0 6.3 12.5 0.1 0.1 Current revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on income and wealth . . . . . . . . . . . . . . . Taxes on households . . . . . . . . . . . . . . . . . . . . Taxes on corporations. . . . . . . . . . . . . . . . . . . Social contributions. . . . . . . . . . . . . . . . . . . . . . . . Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private sector system . . . . . . . . . . . . . . . . . Civil servants’ system . . . . . . . . . . . . . . . . Imputed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on production and imports . . . . . . . . . . . . of which: Value added tax . . . . . . . . . . . . . . . . . . . . . . Tax on oil products . . . . . . . . . . . . . . . . . . . Car tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of goods and services . . . . . . . . . . . . . . . . . . . Other current revenue . . . . . . . . . . . . . . . . . . . . . . . Sources: INE, Ministério das Finanças and Banco de Portugal. Notes: (a) Excluding corporate hospitals from general government in 2002. (b) The contribution to the underlying fiscal position is measured by the change in the various components of the cyclically adjusted current revenue, as a percentage of GDP, and excludes items that simultaneously affect revenue and expenditure. A positive (negative) figure indicates a contribution to the improvement (deterioration) of the underlying fiscal position. However, this behaviour was affected by the payment of an outstanding amount by the State to Social Security, in the context of the Supplementary Budget for 2004, related to social contributions where the State partially replaced small farmers between 2001 and 2003 (€181.8 million), which were included included in the National Accounts of those years, on the expenditure side. In 2004 revenue from taxes on production and imports grew more than in the previous year, rising by 0.2 p.p. of GDP. As it happened since 2001, the increase in revenue from the Value Added Tax (VAT) (4.7 per cent) was influenced by the decline in the share of VAT, which is revenue of the European Union, offset by an increase in the financial contribution based on the Gross National Product. Adjusted for this effect, in 2004 the rise in VAT revenue 94 was lower than private consumption growth, even though the strong increase in revenue in February 2005 made it possible, in terms of National Accounts, to offset the fact that tax refunds had been temporarily withheld at the end of 2003 and during the first two months of 2004. Regarding other taxes on production and imports, revenue from the Tax on Oil Products grew only by 0.6 per cent, despite the increase in unit tax rates by 6.6 per cent for diesel and 3.7 per cent for petrol. This was mainly due to the gradual replacement of the consumption of petrol by diesel, whose unit tax rates are lower. In turn, the Car Tax revenue grew markedly (14.0 per cent), as a result of the rise in the number of motor vehicles sold, as well as in their average engine capacity. Tax revenue on Tobacco recorded in National Accounts decreased only by 3.9 per cent, despite the 16.1 Banco de Portugal | Annual Report | 2004 Chapter 6 Public finances per cent decline on a Public Accounts basis. This was due to the methodological change regarding the recording of this tax introduced in the excessive deficit procedure notification of February 2005, which implied an adjustment in order to take into account the time lag in its collection(6). Indeed, including the January 2005 tax revenue (and excluding the January 2004 one) added €149.7 million to the tax revenue on a National Accounts basis. This reflects the fact that the early introduction of tobacco in the distribution circuit due to the increased taxation included in the State Budget for 2005 was felt later than in the previous year. Finally, it is worth noting the significant increase in the Municipal Property Tax revenue in 2004 (9.8 per cent), which can be explained by the gradual update of the values of buildings and land for tax purposes, within the framework of the real estate tax reform introduced at the end of 2003. Sales of goods and services and other current revenue grew markedly in 2004, reaching 6.3 and 12.5 per cent respectively. Regarding other current revenue, special mention should be made to developments in gross dividends received by the State, which increased by 7.2 per cent, as well as to the 23.9 per cent rise in transfers from the European Social Fund, on an accrual basis. 6.3 Current expenditure(7) In 2004 current expenditure did not contribute to the improvement in the underlying fiscal position (Table 6.3). Given that interest expenditure decreased slightly, the cyclically adjusted primary current expenditure, also adjusted for the items that simultaneously affect (6) The same methodological change was introduced in the recording of the Tax on Oil Products and of the Tax on Alcohol and Alcoholic Beverages. The impact on revenue on a National Accounts basis was negligible in 2004 (€19.5 million and €5.7 million respectively). (7) The values of the various current and capital expenditure items may be significantly revised when less preliminary accounts are compiled for the different general government sub-sectors in 2004, particularly regional and local government. Banco de Portugal | Annual Report | 2004 revenue and expenditure, had a change of 0.2 p.p. of GDP. Indeed, the measures to contain expenditure had an impact mainly on compensation of employees, which decreased by 0.3 p.p. of GDP. However, the trend in pension expenditure implied an increase of 0.7 p.p. of its ratio to GDP in 2004, more than offsetting the previous effect. Current primary expenditure recorded slightly lower growth in 2004 than in the previous year, increasing by 0.7 p.p. of GDP(8). Compensation of employees grew by 3.9 per cent, similarly to what occurred in 2003. Developments in this item are strongly influenced by the growth of State transfers to the CGA, which, as already mentioned, increased by 22.2 per cent in 2004. The rise in compensation of employees, excluding this component, was very moderate, standing at around 1.1 per cent in 2004. As in 2003, this behaviour resulted from the small update of the wage scale, given that wages above €1021 were not updated and the remaining ones were increased by 2.0 per cent. Additionally, the hiring of civil servants in central government remained moderate, as reflected in the 0.3 per cent average growth in the number of CGA subscribers (0.2 per cent in 2003). Intermediate consumption expenditure grew by 6.1 per cent in 2004, after a 0.8 per cent increase in the previous year, indicating a clear loosening in fiscal restraint regarding the purchase of goods and services. In 2004 cash transfers to households continued to be the most buoyant component of current expenditure, growing by 8.2 per cent, after the 10.0 per cent expansion in 2003. This slight deceleration is mainly explained by developments in expenditure on unemployment benefits, whose growth decreased from 36.6 per cent in 2003 to 11.8 per cent in 2004, in line with a lower increase in the number of new unemployed. Public spending on pensions continued to grow strongly, both in the private (8) Growth rates in 2003 are adjusted for the effect of the transformation of public hospitals into corporate hospitals. For more details, see the Banco de Portugal Annual Report 2003. 95 Chapter 6 Public finances Table 6.3 GENERAL GOVERNMENT CURRENT EXPENDITURE Structure as a percentage of GDP Growth rates per cent Contribution to the underlying fiscal position in 2004(b) (percentage points) 2003 2004 2003(a) 43.0 15.0 3.7 2.9 21.4 17.1 14.3 43.6 15.0 3.8 2.8 22.0 17.9 14.9 5.1 3.8 0.8 -3.0 8.1 7.9 10.0 5.1 3.9 6.1 1.4 6.2 8.0 8.2 0.1 -0.3 0.1 -0.1 0.4 0.6 0.5 1.1 6.9 3.7 2.9 1.6 2.7 1.2 7.3 4.0 3.0 1.6 2.5 36.6 7.2 14.4 -1.6 10.6 8.1 11.8 9.0 10.6 7.0 6.3 -5.0 0.0 0.4 0.3 0.1 -0.1 -0.2 40.1 40.8 5.8 5.3 0.2 Current expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation of employees . . . . . . . . . . . . . . . . Intermediate consumption . . . . . . . . . . . . . . . . . . Interest on public debt . . . . . . . . . . . . . . . . . . . . . . Current transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . to households . . . . . . . . . . . . . . . . . . . . . . . . . . . in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: unemployment benefits. . . . . . . . . . . . . . private sector pensions . . . . . . . . . . . . . . civil servants pensions. . . . . . . . . . . . . . . in kind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . to corporations (subsidies) . . . . . . . . . . . . . . . . other transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . Memo: Primary current expenditure . . . . . . . . . . . . . . . . 2004 Sources: INE, Ministério das Finanças and Banco de Portugal. Notes: (a) Excluding corporate hospitals from general government in 2002. (b) The contribution to the underlying fiscal position is measured by the change in the various components of the cyclically adjusted current expenditure, as a percentage of GDP, and excludes items that simultaneously affect revenue and expenditure. A positive (negative) figure indicates a contribution to the deterioration (improvement) of the underlying fiscal position. sector social security system (9.0 per cent) and in the civil servants’ pension system (10.6 per cent), leading to a 0.6 p.p. rise in primary current expenditure as a percentage of GDP(9). The deceleration in pensions paid by the CGA in 2004 was due to the change in initial pension calculation rules and to the fading away, in the course of the year, of the effect of the wave of retirement requests caused by the possibility of a change in applicable rules from 2003 onwards. On the other hand, the growth rate in 2003 also reflected the transfer to the CGA of the responsibility for paying pensions of the beneficiaries of the CTT (Post Office) pension fund from January 2003 onwards. In 2004, despite the transfer to CGA of a high amount of liabilities with pensions, the corresponding effect was significantly lower given that it was (9) Expenditure on old-age, disability and survival pensions of the private sector social security system increased by 10.0, 2.0 and 10.9 per cent respectively, in 2004. 96 only effective from December onwards. The marked upward trend in old-age and survival pension expenditure is mainly explained by the combination of the increase in the number of pensioners and the average pension. The latter results from the annual updates and from new pensioners receiving higher pensions, on average, than pensioners ceasing to be part of the system after death. Over the last three years, in annual average terms, the number of old-age and survival pensioners grew by 2.1 per cent in the private sector social security system and by 3.6 per cent in the civil servants pension system. To this effect adds the annual update, which in the past few years has been influenced by extraordinary increases in lower pensions, gradually implemented between 2001 and 2004 in the civil servants pension system, and between 2003 and 2006 in the private sector social security system. Finally, the additional contribution of the composition effect to growth of pension expenditure Banco de Portugal | Annual Report | 2004 Chapter 6 Public finances reached 3.9 and 5.6 p.p., in the private sector social security system and the civil servants pension system respectively. The cumulative effect over the last three years of the increase in pension expenditure amounts to around 1.8 p.p. of GDP, of which 0.4 p.p. account for the effect of the rise in the number of pensioners and the remainder stems from the impact of the increase in average pensions. Transfers to households in kind grew by 7.0 per cent in 2004, after a decrease of 1.6 per cent in 2003. Underlying the significant growth of this item is expenditure on medical services and drugs co-financing, which increased by 9.8 per cent (0.9 per cent in 2003). In fact, in 2003 the increased use of generic pharmaceutical products and changes in drugs co-financing contributed to the restraint in the level of this expenditure item, but the growth trend remained virtually unchanged. The amount paid by the National Health Service to corporate hospitals for the provision of services increased by 2.8 per cent in 2004. Expenditure on subsidies increased by 6.3 per cent in 2004, as the rise in compensatory payments to public corporations (13.1 per cent) and in expenditure related to professional training financed by the European Social Fund (18.8 per cent), was partly offset by the marked fall (32.8 per cent) in interest relief grants for house purchase. Interest payments on public debt grew by 1.4 per cent in 2004 (after a 3.0 per cent decline in 2003), leading to a further decrease of 0.1 p.p. of the respective ratio to GDP. This outcome was due to a decline in the implicit interest rate on public debt, which offset most of the effect of the stock increase. The rise of Treasury bills issued in 2004 enabled some savings to be made on interest payments in a context in which the yield curve slope remained quite steep. 6.4 Capital revenue and expenditure The capital balance contributed with 0.4 p.p. of GDP to the deterioration of the underlying fiscal position in 2004, as a result of the increase of capital expenditure (Table 6.4). Indeed, excluding the impact of temporary measures and transfers from the European Union, the ratio of capital revenue to GDP remained Table 6.4 GENERAL GOVERNMENT CAPITAL REVENUE AND EXPENDITURE (excluding temporary measures) Structure as a percentage of GDP Growth rates per cent 2003 2004 Contribution to the underlying fiscal position in 2004(a) 2003 2004 Capital balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2.7 -3.1 - - -0.4 Capital revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 1.6 1.0 -11.0 0.0 Capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . GFCF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other capital expenditure(b). . . . . . . . . . . . . . . . . . . 4.6 3.3 1.2 4.7 3.3 1.4 -1.8 -5.9 11.4 6.9 3.3 16.8 0.4 - (percentage points) Sources: INE, Ministério das Finanças and Banco de Portugal. Notes: (a) The contribution to the underlying fiscal position is measured by the change in the various components of capital revenue and expenditure, as a percentage of GDP, and excludes items that simultaneously affect revenue and expenditure. A positive (negative) figure in the balance and capital revenue indicates a contribution to the improvement (deterioration) of the underlying fiscal position. The opposite applies to capital expenditure. (b) Includes capital transfers and the net acquisition of non-financial non-produced assets. Banco de Portugal | Annual Report | 2004 97 Chapter 6 Public finances 6.5 Public debt and deficit-debt adjustments unchanged. General government capital revenue declined by 11.0 per cent in 2004, after having increased by 1.0 per cent in 2003. Developments in 2004 were mainly explained by the decline in capital transfers from the Community budget aimed at co-financing investment expenditure and capital transfers of the general government, which fell by 17.0 per cent in 2004 (after a 4.6 per cent decline in 2003). These transfers are recorded in National Accounts on an accrual basis, so that the deficit is not affected by lags between the moment when expenditure is actually incurred by the national authorities and the respective transfer from the European Union. Moreover, developments in capital revenue in 2004 reflect the end of the Inheritance and Gift Tax in the context of the recent reform of taxes on wealth. In 2004 capital expenditure grew by 6.9 per cent (after declining by 1.8 per cent in 2003), well above the increase in GFCF (3.3 per cent), given that other capital expenditure increased by 16.8 per cent. The rise in the latter can be largely explained by the reclassification of the capital injection into RTP (public TV network) as a capital transfer (€216.7 million) in 2004, and may also be associated with an increase in national co-financing of investment projects. The public debt ratio stood at 61.8 per cent at end-2004 (Table 6.5 and Chart 6.3), i.e. more 1.8 p.p. than at end-2003. These developments are mainly due to the combined effect of deficit-debt adjustments and to the differential between the implicit interest rate and the nominal GDP growth rate, while the primary balance made a negligible contribution. The overall amount of deficit-debt adjustments reached 0.9 per cent of GDP in 2004, which means that the change in debt exceeded the deficit (Table 6.6). The figure for this variable globally reflects an increase in assets held by the general government, which amounted to 0.6 per cent of GDP, together with the also positive contribution of other deficit-debt adjustments (0.5 per cent of GDP). Valuation effects had a downward effect on debt of around 0.2 per cent of GDP. The increase in assets held by the general government in 2004 was mainly due to an accumulation of other short-term assets (amounting to 1.1 per cent of GDP), mostly as a result of the fact that in 2004 the CGA did not receive all assets corresponding to liabilities with pensions of state-owned corporations assumed in the course of the year. This effect is partly offset, inter alia, by a fall in deposits of around 0.2 per cent of GDP. As regards the net acquisition of shares and other equity, in 2004 the general government received significant Table 6.5 BREAKDOWN OF THE CHANGE IN THE GENERAL GOVERNMENT DEBT RATIO As a percentage of GDP 2000 2001 2002 2003 2004 Debt at the beginning of the year . . . . . . . . . . . 54.3 53.3 55.9 58.5 60.0 (+) Primary deficit . . . . . . . . . . . . . . . . . . . . . . . . -0.4 1.2 -0.3 0.0 0.1 (+) Contribution of interest payments . . . . . . . 3.2 3.2 3.0 2.9 2.8 -2.0 (-) GDP growth contribution . . . . . . . . . . . . . . . -3.5 -3.0 -2.6 -0.9 (+) Deficit-debt adjustments . . . . . . . . . . . . . . . -0.3 1.3 2.5 -0.4 0.9 Debt at the end of the year . . . . . . . . . . . . . . . . . 53.3 55.9 58.5 60.0 61.8 Sources: Ministério das Finanças and Banco de Portugal. 98 Banco de Portugal | Annual Report | 2004 Chapter 6 Public finances Chart 6.3 BREAKDOWN OF THE CHANGE IN THE GENERAL GOVERNMENT DEBT RATIO BREAKDOWN OF THE DEFICIT-DEBT ADJUSTMENTS Primary deficit Privatisations Change in other assets Effect of interest net of output growth Deficit-debt adjustments 1.5 Change in consolidated gross debt 2.5 As a percentage of GDP As a percentage of GDP 3.0 Equity injections Other adjustments 2.0 1.5 1.0 0.5 1.0 0.5 0.0 -0.5 -1.0 0.0 -0.5 2001 2002 2003 2004 -1.5 2001 2002 2003 2004 Sources: Ministério das Finanças and Banco de Portugal. proceeds from privatisations, amounting to €1481 million, and capital injections were also well above the value recorded in the previous year, mainly due to a €800 million capital injection in Caixa Geral de Depósitos. With regard to debt valuation effects, there were no significant foreign holding gains and losses with an impact on debt in 2004. In contrast, the difference between interest recorded in the deficit on an accrual basis and interest actually paid contributed to dampen debt growth (by 0.2 per cent of GDP). This differ- Banco de Portugal | Annual Report | 2004 ence was relevant not only for savings certificates but also for other debt instruments. The overall contribution of other deficit-debt adjustments was positive, reaching around 0.5 per cent of GDP. This was mainly related to the payment of expenditure occurred in previous years in the context of the Supplementary Budget for 2004 that had affected the deficit but not the debt in those years, in particular regarding the National Health Service (note that this item was negative in 2003). 99 Table 6.6 GENERAL GOVERNMENT DEFICIT-DEBT ADJUSTMENTS As a percentage of GDP 2000 2001 2002 2003 2004 General government deficit (EDP) . . . . . . . . . . . . . . . . . . . (1) 2.8 4.4 2.7 2.9 2.9 Change in debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) 2.5 5.6 5.2 2.5 3.8 Deficit-debt adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3)=(2)-(1)=(4)+(13)+(16) -0.3 1.3 2.5 -0.4 0.9 Transactions in assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity. . . . . . . . . . . . . . . . . . . . . . . . . . Privatisations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity injections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other short-term assets(a) . . . . . . . . . . . . . . . . . . . . . . . . (4)=(5)+(6)+(7)+(8)+(12) -0.9 -0.6 0.2 0.1 -0.9 -2.0 1.0 0.1 0.2 1.1 -1.5 0.1 0.1 -0.1 -0.3 0.3 0.0 2.3 2.0 1.2 0.1 0.2 0.5 -0.3 0.9 -0.1 0.0 0.2 -1.0 0.1 0.3 0.6 0.0 0.3 0.2 0.2 0.6 -0.2 -0.1 0.1 -0.3 -1.1 0.6 0.2 1.1 Valuation effects in debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange holding gains and losses. . . . . . . . . Other valuation effects . . . . . . . . . . . . . . . . . . . . . . . . . . (13)=(14)+(15) (15) 0.0 0.2 -0.2 -0.3 0.0 -0.3 -0.2 0.1 -0.3 -0.1 -0.1 0.0 -0.2 0.0 -0.2 (16) 0.6 0.5 0.7 -0.5 0.5 Other debt-deficit adjustments(b) . . . . . . . . . . . . . . . . . . . . . (5) (6) (7) (8)=(9)+(10)+(11) (9) (10) (11) (12) (14) Sources: INE, Ministério das Finanças and Banco de Portugal. Notes: (a) Includes, inter alia, the difference between revenue recorded in National Accounts and the amounts actually received in cash and the change in advances from Treasury for transfers to be received from the European Union to co-finance expenditure in the year. (b) Includes, inter alia, the difference between expenditure recorded in National Accounts and the amounts actually paid on a cash basis, the general government debts settled by the Treasury and the assumption of debts of non-general government entities by the Treasury not recorded in the deficit. Chapter 6 Public finances Box 6.1 BUDGETARY EFFECTS OF THE TEMPORARY MEASURES IMPLEMENTED FROM 2002 TO 2004 Temporary measures affecting the general government balance and/or debt have been implemented in a number of EU Member States in the past few years. The measures with an impact on the balance can be defined as policy decisions that change the level of general government revenue and/or expenditure during a very limited period of time (one-off measures), or simply modify the time profile of general government revenue and/or expenditure in the medium- and long term horizon (self-reversing measures). Governments may implement temporary measures with a view to responding to exceptional circumstances, or to facilitating gradual fiscal adjustments. In the latter case, they create room for implementing more effective and permanent measures to solve structural problems affecting public accounts. However, recourse to temporary measures may also signal the Governments’ failure to take appropriate measures to solve structural imbalances. In both cases, it is crucial to clearly identify and quantify them when assessing the underlying fiscal position and the sustainability of the policies pursued, notably taking into account the possible costs that these measures may imply in terms of the fiscal position in the medium and long term. In Portugal, from 2002 to 2004 the general government deficit stood always below the reference value of 3 per cent of GDP. This was due to recourse to very significant temporary measures, whose direct impact on the fiscal balance reached 1.4, 2.5 and 2.3 per cent of GDP in 2002, 2003 and 2004 respectively. Table 1 shows the operations that contributed to these figures and their impact as a percentage of GDP on the different revenue and expenditure items. The budgetary impact of temporary measures is often difficult to assess. Indeed, multiple second-round effects, which can only be examined very roughly, add to the direct effects that are fairly easy to identify and quantify. In Portugal, the main self-reversing measures implemented in the past few years were the sale of tax credits in 2003 and transfers of assets from state-owned corporations to the general government in 2003 and 2004, as a counterpart for the payment of future pensions to their employees. Such measures led to an increase in revenue in the years when they were implemented, but implied a decline in revenue or an increase in expenditure in the subsequent years. The sale of tax credits consisted in the sale to a non monetary financial institution, Sagres, in December 2003 of credits subject to coercive collection relating to taxes and social contributions, by the amount of €1760 million. This amount was included in the revenue of the different taxes and social contributions, pro rata to their weight in the nominal value of the credit portfolio sold (€11441.4 million). In turn, as from 2003 and for some years, part of taxes and social contributions collected by the tax administration will not be recorded as general government revenue, widening the deficit of this institutional sector. The payments to Sagres amounted to €105.4 million and €462.9 million in 2003 and 2004 respectively. Transfers of assets from State-owned corporations to the general government are the counterpart for the future payment of pensions by this sector to their employees, already retired or still in the labour force. The main operations involved CTT (€1300 million) in 2003, and Caixa Geral de Depósitos (€2504.4 million), Navegação Aérea de Portugal (€235.7 million), ANA-Aeroportos de Portugal (€173.6 million) and Imprensa Nacional Casa da Moeda (€137.8 million) in 2004. These transfers gave rise to the building up of special reserves, which together with income generated by their investment and in some cases the payment of contributions, will support future pension payments. However, the “reversing” effects net of transfers to the general government widened the deficit of this sector by 0.07 per cent of GDP both in 2003 and in 2004. Banco de Portugal | Annual Report | 2004 101 Table 1 MAIN EFFECTS OF TEMPORARY MEASURES INCLUDED IN GENERAL GOVERNMENT ACCOUNTS IN THE 2002-2004 PERIOD As a percentage of GDP 2002 2003 “Direct” effects “Direct” effects Extraordinary Sale of the Sale of the settlement of fixed tele- rights to communi- reintroductax arrears cations net- ing tolls in a motorwork way Total revenue . . . . . . . . . . . . . . . . . . . . . . Current revenue . . . . . . . . . . . . . . . . . Taxes on income and wealth . . . . . Taxes on production and imports . Social contributions . . . . . . . . . . . . . Other revenue . . . . . . . . . . . . . . . . . . Capital revenue . . . . . . . . . . . . . . . . . . Total expenditure . . . . . . . . . . . . . . . . . . Current expenditure . . . . . . . . . . . . . . Pensions . . . . . . . . . . . . . . . . . . . . . . . Capital expenditure . . . . . . . . . . . . . . Net purchase of non-financial non-produced assets. . . . . . . . . . . . . Overall balance . . . . . . . . . . . . . . . . . . . . Total “direct” effects . . . . . . . . . . . . . . . . Total “direct” effects + “reversing” effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.91 0.91 0.49 0.31 0.11 “Reversing” effects Extraordi- Transfer of Sale of tax credits nary settle- pensions ment of tax funds to arrears general gov(January 3) ernment 0.15 0.15 0.05 0.07 0.04 1.00 2004 1.35 1.35 0.44 0.67 0.24 Net charges Collection of tax with transfers of pen- credits sold sions funds to “Sagres” to general government 0.03 0.03 0.03 -0.08 -0.08 -0.04 -0.04 0.00 1.00 0.91 -0.28 -0.22 -0.28 -0.22 -0.28 0.28 -0.22 0.22 “Direct” effects “Reversing” effects Transfer of pensions funds to general government Net charges Collection of tax with transcredits fers of pensold to sions funds “Sagres” to general government 2.26 0.03 0.02 1.00 1.35 -0.07 0.12 0.12 0.12 -0.08 2.26 1.42 2.49 2.26 1.42 2.34 1.85 Sources: Comissão para a Análise da Situação Orçamental and Banco de Portugal. -0.34 -0.34 -0.13 -0.16 -0.05 2.26 0.11 0.11 0.11 0.15 0.05 0.05 -0.07 -0.34 Chapter 7 Financial situation 7 Financial situation The growing financial integration of the Portuguese economy, which has intensified with participation in the euro area, continued in 2004, boosted by a historically low level of nominal and real interest rates. This is partly associated with the increased willingness of international investors to take on risk. The latter was reflected in the narrowing of the credit spreads, which benefited also Portuguese issuers in international markets. Under these circumstances, it was possible to accommodate the higher borrowing requirements of the economy in 2004, discouraging the adjustment of domestic demand. The financing strategy in the securities market adopted by non-financial corporations and the general government favoured short-term issues, in contrast to the financial system that continued to lengthen the average maturity of financing. The indebtedness ratio of the non-financial sector continued to increase, particularly for households. The banking system showed a further improvement in the solvency, liquidity and credit quality indicators. Profitability indicators fell from the previous year, but stood substantially above the through of 2002, a particularly adverse year for banking activity in continental Europe. 7.1 Financial account and international investment position In 2004, the joint deficit of the current and capital accounts went up to 5.9 per cent of Gross Domestic Product (GDP) (3.3 per cent in 2003), reflecting an increase in private sector borrowing requirements. In effect, this sector moved from financing capacity of 2.0 per cent of GDP in 2003 to borrowing requirements of 0.7 per cent of GDP in 2004. In turn, the borrowing requirements of the general government, adjusted for temporary measures, remained above 5 per cent of GDP (5.3 per cent in 2003 and 5.2 per cent in 2004), close to the level of the joint deficit of the current and capital accounts (see Table 3.5 of Section 3.3 Current and capital accounts)(1). Banco de Portugal|Annual Report|2004 The financial account reflects the channels used to process the external financing of the economy, in terms of institutional sectors and instruments. In 2004, it posted net inflows amounting to 7.0 per cent of GDP (Table 7.1). As in recent years, entries in the financial account were affected by special or temporary operations that, although not implying changes to the overall balance, substantially alter flows at a more detailed level, thus hindering their analysis. Two types of operations are worth mentioning. First, end-of-year temporary operations between other monetary financial institutions (chiefly banks) and monetary authorities that only affect the distribution of the external position of the economy between these two sectors. This type of operation had some effects on flow statistics of “other investment” in 2003 and 2004, preventing the direct interpretation of the importance of banks for the financing of the economy. Second, the analysis of the financial account should consider the impact of credit securitisation operations carried out by banks. These operations make it possible to finance banks against the issue of securities by the non-Monetary Financial Institutions (MFI) sector. Since non-residents usually take these securities, they affect the financial account, giving rise to portfolio liability flows within the non-MFI sector. In some situations, however, the banks ceding the credits (or other banks of the same financial group) repurchase the securities resulting from securitisation operations, which represents asset portfolio investment flows in the financial account. This does not imply, however, a change in the nature of bank credit granted to resident sectors, which remains de facto in the banks’ portfolio, although taking the form of securities issued by non-residents. When adjusted for these two effects, banks continued to play an important role as a coun(1) The figures for borrowing requirements/financing capacity of the resident sectors are adjusted for the direct effects of the sale of tax credits and for the transfer of assets from publicly-owned corporations to the general government. For further details, see “Box 6.1 Budgetary effects of the temporary measures implemented from 2002 to 2004“ in Chapter 6 Public finances. 103 Table 7.1 FINANCIAL ACCOUNT (a) As a percentage of GDP 2002 Net change 2003 Change in liabilities Change in assets -18.2 -5.0 0.0 -14.4 3.1 -6.4 4.4 2004 Net change Change in liabilities Change in assets 3.6 -0.5 -0.1 -3.9 0.0 3.5 4.4 14.3 0.7 0.9 7.7 -2.4 8.3 - -7.3 -3.7 -1.7 -6.8 2.4 -0.3 1.1 -3.5 (2.7) -3.9 0.0 -4.0 (2.1) 4.4 4.4 (0.9) 0.0 4.4 (0.9) - 1.3 0.7 0.0 -0.6 1.1 5.7 (2.2) 0.7 0.0 3.8 (0.3) 1.1 -3.3 Net change Current and capital account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -6.0 Financial account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) offshores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 1.3 -1.2 2.4 0.0 2.6 -0.9 21.8 4.4 -0.1 10.5 -3.1 9.9 - -5.9 Monetary authorities(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 0.4 0.0 0.6 -0.9 -4.3 (1.9) 0.0 -4.3 (1.9) - General government. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) offshores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 0.0 0.0 2.8 0.2 0.1 3.7 0.0 0.0 4.3 -0.5 0.0 0.2 0.0 0.0 -0.2 0.5 0.0 3.9 0.0 0.0 4.0 -0.1 0.0 4.1 0.0 0.0 4.1 -0.2 0.3 0.3 0.0 0.0 -0.1 0.2 0.1 4.4 0.0 0.0 4.0 0.0 0.4 Monetary and financial institutions(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) offshores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 0.1 0.2 -0.6 -0.1 6.9 11.6 0.2 0.2 0.0 -1.9 13.4 -8.3 (-14.4) -0.2 -0.2 -4.2 2.0 -5.9 (-12.1) 3.4 (-2.8) 0.0 0.0 -4.2 0.1 7.5 (1.4) -1.9 -1.5 -1.5 -0.8 -1.5 2.0 -2.5 (0.9) -0.2 -0.2 -3.4 1.5 -0.5 (3.0) -4.4 (-0.9) -1.7 -1.7 -4.2 0.0 1.5 (5.0) Non-monetary financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) offshores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0.1 0.3 0.2 -1.2 0.0 0.7 6.6 -1.1 -0.7 8.0 -0.5 0.2 -2.9 0.1 0.1 -3.7 0.5 0.2 3.7 -1.1 -0.6 4.4 0.0 0.4 5.2 1.6 1.5 3.9 -0.5 0.2 -2.5 0.0 0.0 -3.0 0.5 -0.1 2.7 1.6 1.6 1.0 0.0 0.2 Non-financial corporations and private individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) off-shores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -3.9 0.9 -1.5 1.0 0.0 -5.7 4.2 5.4 0.5 -1.8 -0.1 0.7 -8.1 -4.9 0.1 -2.4 0.1 -1.0 -4.0 0.5 0.6 -4.1 0.0 -0.4 2.4 0.6 0.8 0.5 -0.1 1.4 -3.8 -3.5 -1.5 -1.1 0.1 0.7 -1.4 -2.9 -0.7 -0.6 0.0 2.1 Errors and ommissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6 7.0 -3.0 -0.8 0.9 0.0 8.0 1.1 By institutional sector of resident investor: 0.8 -3.9 0.0 0.3 4.4 -0.3 Sources: INE and Banco de Portugal. Notes: (a) A (+) sign means an increase in foreign liabilities or a decrease in foreign assets, i.e. a financial inflow. A (-) sign means a decrease in foreign liabilities or an increase in foreign assets, i.e. a financial outflow. (b) The figures in brackets in other investment of monetary authorities and of other monetary financial institutions are adjusted for temporary end-of-year operations between the two sectors reversed on the first days of the subsequent year. -1.1 Chapter 7 Financial situation Banco de Portugal|Annual Report|2004 Chart 7.1 SPREADS OF SUBORDINATED SECURITIES ISSUED BY EUROPEAN BANKS (DENOMINATED IN EURO) VIS-À-VIS TREASURY BONDS Basis points terpart to flows with non-residents, contributing significantly to finance the widening of the joint deficit of the current and capital accounts. This reflects the central position of banks in financial intermediation in Portugal. As in previous years, this was chiefly associated with other investment flows. The latter correspond to the accounting record of, inter alia, loans/deposits from subsidiaries abroad of Portuguese banking groups (representing the channelling of funds that result from the issue abroad by the same subsidiaries of medium and long/term securities denominated in euro); net financing in the euro area money market; and deposits in Portugal of non-resident nonbanks. Combining the information in the financial account and in the banking sector balance sheet on a consolidated basis, it can be concluded that the rise in the external indebtedness of banks in 2004, as reflected in the item “other investment” of the financial account, was largely due to the increase in deposits by non-resident non-banks. Market external financing of banks has stabilised as a percentage of GDP. The issue of securities increased further, particularly longer-term securities, while recourse to the interbank money market in the euro area declined in net terms. Banks have therefore taken advantage of the very favourable conditions in international financial markets to lengthen the average maturity of external financing and, as a result, to improve their liquidity ratios (Charts 7.1 and 7.2). In addition to the increase in bank-intermediated financing, there were also direct foreign net inflows to non-financial corporations in 2004, in contrast to the very significant outflows observed in 2003. This development was chiefly due to the new issues of commercial paper in 2004, partly taken by non-residents, in contrast to the net repayments of this instrument in the previous year. Moreover, the increase of liabilities in “other investment” contributed also to corporate financing abroad. The latter reflected in particular the increase in trade credits obtained from suppliers, in line with the acceleration of imports, and given that the average time until the payment of those credits remained unchanged vis-à-vis the 270 Spread of subordinated securities issued by banks tier I(a) 220 Spread of subordinated securities issued by banks upper tier II(a) 170 Spread of subordinated securities issued by banks lower tier II(a) 120 70 20 Dec. Dez.01 Jun.02 Dec. Dez.02 Jun.03 Dec. Dez.03 Jun.04 Dec. Dez.04 Sources: JP Morgan and Bloomberg. Note: (a) According to the taxonomy defined by the Basle Committee in “International convergence of capital measurement and capital standards”, July 1988. “Upper Tier II” refers to instruments that, although not eligible as “Tier I”, have undefined maturity or are perpetuities. In general “lower Tier II“ refers to instruments with defined maturity. previous year. As previously mentioned, and as in 2003, a substantial share of portfolio investment abroad by banks consisted of the acquisition of securities issued by non-resident special-purpose vehicles which, in turn, acquired the units resulting from securitisation operations. In turn, a significant share of net acquisitions by non-residents of securities issued by non-monetary financial institutions relates to transactions of those units. Finally, major institutional investors in the non-MFI sector, in particular insurance companies and pension funds, continued to invest heavily in securities issued by non-residents and denominated in euro, taking advantage of the portfolio diversification opportunities provided by participation in the euro area. As in previous years, acquisitions of Portuguese government securities by non-residents were significant in 2004. As in 2003, these acquisitions were higher than consolidated net 105 Chapter 7 Financial situation Chart 7.2 Chart 7.3 GROSS INTERNATIONAL BOND ISSUANCE BY BRANCHES AND SUBSIDIARIES ABROAD OF PORTUGUESE BANKING GROUPS PORTUGAL 10-YEAR INTEREST RATE DIFFERENTIAL VIS-À-VIS GERMANY By original maturity 16 14 over 10 years or perpetual bonds 5 to 10 years 2 to 5 years up to 2 years 12 10 Basis points EUR billion 12 14 8 10 8 6 6 4 4 2 2 0 Dec.02 Mar.03 Jun.03 Sep.03 Dec.03 Mar.04 Jun.04 Sep.04 Dec.04 0 1997 1998 1999 2000 2001 2002 2003 2004 Source: Reuters. Sources: Dealogic Bondware, Bloomberg and Thomson Financial Datastream. 106 As a percentage of GDP Portuguese investment abroad (excluding offshores) Foreign direct investment (excluding offshores) 6 5 4 FDI balance (excluding offshores) 3 Per cent issues of general government securities. It should be stressed that the purchase by non-residents of very large amounts of short-term Portuguese government debt took place in the context of very low differentials vis-à-vis German government debt interest rates in the fixed-rate long-term segment (Chart 7.3). The analysis of foreign direct investment should be preceded by some adjustments to the information contained in the financial account, in order to take into take into consideration the frequent and sizeable foreign direct investment operations conducted in Portugal by companies operating in the Madeira and Santa Maria offshore centres, that subsequently reinvest these funds in third countries. In 2004, excluding corporations having their head office in such offshore centres, both Portuguese direct investment abroad and foreign direct investment in Portugal have increased, which is consistent with the recovery of global foreign investment flows. Flows of foreign direct investment in Portugal and of Portuguese direct investment abroad translated into a net outflow of 0.7 per cent of GDP in 2004, after the 2003 virtually nil balance (Chart 7.4). Chart 7.4 FOREIGN DIRECT INVESTMENT EXCLUDING MADEIRA AND SANTA MARIA OFFSHORES 2 1 0 -1 -2 -3 -4 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sources: INE and Banco de Portugal. The net debtor position of the Portuguese economy vis-à-vis the rest of the world, assessed by the International Investment Position, rose by 6.2 percentage points (p.p.) of GDP in 2004, to stand at the end of the year at 59.7 per cent of GDP. Unfavourable price changes in net terms of around 1 per cent of GDP were more than offset by the positive contribution of nominal GDP growth, resulting in an increase in net liabilities of the economy as a Banco de Portugal |Annual Report|2004 Table 7.2 INTERNATIONAL INVESTMENT POSITION As a percentage of GDP EUR million 2002 2003 End of period position End of period position -62 223 -19 293 -12 097 479 -48 192 16 879 -69 866 -18 455 -9 314 - 28 -52 216 10 146 Monetary authorities(d). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 693 5 690 7 -6 884 16 879 General government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 2003 2004 Price changes Exchange rate changes Other adjustments End of period positions -9 440 4 081 -1 201 55 -10 842 -1 533 -1 295 53 - 601 - 668 22 - 102 182 -9 - 141 0 265 67 - 318 - 102 6 0 - 223 0 -80 738 -14 432 -11 250 - 640 -62 993 8 578 -48.4 -15.0 -9.4 0.4 -37.5 13.1 -53.5 -14.1 -7.1 0.0 -40.0 7.8 -59.7 -10.7 -8.3 -0.5 -46.6 6.3 19 718 10 809 4 -1 242 10 146 -7 638 - 954 -1 -5 150 -1 533 - 117 - 34 -3 22 - 102 47 0 0 - 20 67 42 6 0 36 0 12 052 9 828 0 -6 354 8 578 12.2 4.4 0.0 -5.4 13.1 15.1 (8.9) 8.3 0.0 -1.0 (-7.1) 7.8 8.9 (6.4) 7.3 0.0 -4.7 (-7.2) 6.3 -36 827 0 -36 514 79 - 392 -41 430 0 -41 200 234 - 465 -5 964 0 -5 414 21 - 570 -1 243 0 - 726 - 517 0 - 48 0 10 0 - 58 - 112 0 0 0 - 112 -48 797 0 -47 330 - 262 -1 205 -28.7 0.0 -28.4 0.1 -0.3 -31.7 0.0 -31.6 0.2 -0.4 -36.1 0.0 -35.0 -0.2 -0.9 Other monetary and financial institutions(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -57 716 - 962 -3 938 393 -53 208 -62 975 -1 404 1 149 - 266 -62 454 - 194 - 62 -8 - 125 0 381 -3 99 0 285 - 646 7 0 0 - 653 -57 498 788 6 918 - 369 -64 836 -44.9 -0.7 -3.1 0.3 -41.4 Non-monetary and financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 428 -3 267 28 999 0 697 20 865 -1 932 22 644 0 153 -3 620 -2 125 -1 308 43 - 230 928 -4 985 - 52 0 - 183 -6 - 144 0 - 33 25 -2 0 0 27 18 015 -4 070 22 177 -9 - 83 20.6 -2.5 22.6 0.0 0.5 16.0 -1.5 17.3 0.0 0.1 13.3 -3.0 16.4 0.0 -0.1 Non-financial corporations and private individuals . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -9 802 -15 064 -6 334 0 11 595 -6 044 -15 120 -2 716 0 11 792 1 846 3 956 797 - 30 -2 878 - 670 119 - 819 30 0 - 15 0 - 106 0 91 373 - 106 0 0 479 -4 510 -11 151 -2 843 0 9 484 -7.6 -11.7 -4.9 0.0 9.0 -4.6 -11.6 -2.1 0.0 9.0 -3.3 -8.2 -2.1 0.0 7.0 International investment position (IIP). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transactions 2002 End of period positions By institutional sector of the resident investor: 5 936 2 250 5 678 22 -2 014 -48.2 (-42.0) -42.5 (-40.0) -1.1 0.6 0.9 5.1 -0.2 -0.3 -47.8 (-41.6) -48.0 (-45.5) Sources: INE and Banco de Portugal. Notes: (a) Includes quarterly estimates calculated by the Banco de Portugal based on the accumulation of monthly flows and on the available annual data obtained from Direct Investment Surveys . (b) Includes quarterly estimates calculated by the Banco de Portugal based on the accumulation of monthly flows and on the available annual data obtained from the “Survey on stocks of foreign securities held by residents”. (c) Includes, in some components, quarterly estimates calculated by the Banco de Portugal, based on the accumulation of monthly flows. (d)The figures in brackets in other investment of monetary authorities and of other monetary financial institutions are adjusted for temporary end-of-year operations between the two sectors reversed on the first days of the subsequent year. Chapter 7 Financial situation Chart 7.5 INTERNATIONAL INVESTMENT POSITION(a) As a percentage of GDP Debt (b) Shares and direct investment Total 70 60 50 Per cent 40 30 8.0 16.6 23.3 27.0 32.2 41.1 25.0 22.9 20.5 21.5 21.3 18.6 20 10 0 -10 17.9 23.1 24.8 -8.3 -6.9 -2.5 1996 1997 1998 the Portuguese economy for productive investment, as a result of its deteriorating competitive position and increased international competition, notably from countries where labour costs are much lower and where, in some cases, human resource qualifications are higher. Simultaneously, some major Portuguese corporations increased their internationalisation and invested directly abroad. This was made possible by the decline in financing costs associated with participation in the euro area (Chart 7.5). 7.2 Securities market -20 2000 2001 2002 2003 2004 Sources: INE and Banco de Portugal. Notes: (a) Positive (negative) figures correspond to a net debtor (creditor) position. (b) Includes securities other than shares, other investment, financial derivatives and others. percentage of GDP slightly below the financial account balance. In fact, given that the stock of shares of domestic issuers held by non-residents is higher than the corresponding stock of shares issued by non-residents and held by residents, the price increases in international stock markets has negatively contributed to the change of the International Investment Position, albeit less than in 2003 (Table 7.2). The increase in the net debtor position in 2004 continued to reflect the increasing financial integration of the Portuguese economy, which strengthened after the elimination of the foreign exchange risk associated with participation in the euro area. As observed in recent years, the increase in the debtor position reflected net acquisitions by non-residents of debt instruments issued by domestic entities, to the detriment of investments in shares of Portuguese corporations and of foreign direct investment in Portugal. In effect, non-residents continued to be less prone to establish new companies in Portugal and/or to participate in the capital of existing companies. This seems to be associated with the weaker attractiveness of 108 Profits of listed companies grew considerably. This should have been the main factor behind the very favourable development of their stock prices, compared with companies listed in other international markets. Likewise, the volume of transactions in listed shares recovered considerably in 2004, more sharply than stock market capitalisation (Charts 7.6 and 7.7). Net issues of shares by listed companies increased significantly from the previous year. This recovery was largely due to the issue of shares by EDP - Energias de Portugal, S.A., to be fully allocated to finance the acquisition of a non-resident corporation in the electricity production, distribution and trading sector. Con- Chart 7.6 STOCK PRICE INDICES 120 S&P 500 Dow Jones Euro Stoxx PSI Geral 110 Index Dec.2001=100 1999 100 90 80 70 60 50 Dec.01 Dez.01 Jun.02 Dec.02 Dez.02 Jun.03 Dec.03 Dez.03 Jun.04 Dec.04 Dez.04 Source: Thomson Financial Datastream. Banco de Portugal |Annual Report|2004 Chapter 7 Financial situation Chart 7.7 STOCK MARKET CAPITALIZATION AND TRANSACTIONS 120 Stock market capitalisation (end-of-period) Transactions Average turnover ratio (right-hand scale) 60 90 40 60 20 30 Per cent EUR billion 80 0 0 2000 2001 2002 2003 Source: CMVM. 2004 trary to 2003, issues of shares by listed companies of the financial sector were practically non-existent in 2004, despite significant capital increases by some unlisted major financial groups. In the two sectors as a whole, net issues of shares in the stock exchange remained at very low levels (approximately 60 per cent below the peak of 2000). In turn, public sale offerings continued to be virtually nil, both because the government opted for other mechanisms to place the shares of companies being privatised and because only one private company became listed on the stock exchange (Tables 7.3 and 7.4). Net issues of debt securities by resident sectors increased by approximately 25 per cent in 2004. This was due to the return of non-financial corporations to this market and to higher cash needs of the general government. In fact, Table 7.3 NET ISSUANCE OF SECURITIES BY RESIDENTS IN THE EXTERNAL AND INTERNAL MARKETS BY INSTITUTIONAL SECTOR EUR million 2002 2003 2004 Net issuance by residents Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monetary financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-monetary financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: asset-backed bonds(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non financial corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9489 6583 44 -198 0 3060 6519 4457 1830 1588 1765 -1356 8140 6580 -1425 1356 182 1629 Shares and other equities(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monetary financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-monetary financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: securitisation units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non financial corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment fund units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: money market fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: mutual fund units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: real-estate fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8581 459 3861 2577 4262 1315 501 44 770 13532 1158 8825 8798 3549 2265 385 1220 660 9785 747 5419 4395 3619 1999 1 1060 938 Public sale offerings Privatisations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 3 8 47 0 16 -1655 129 -1582 51 7562 445 7030 91 Memo: Net issuance of debt securities by residents in the external market(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . -2405 Issuance of shares by incorporation of reserves(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439 Net issuance abroad by non-resident entities that are branches and subsidiaries of resident entities: Financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6573 Non-financial institutions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950 Sources: CMVM and Banco de Portugal. Notes: (a) See Decree-Law no 453/99 of 5 November, as amended by Decree-Law no 82/2002 of 5 April. (b) Excluding investment fund units. Only shares/securitisation units are considered. (c) Included in “Debt securities”. (d) Included in “Shares and other equity”. Banco de Portugal|Annual Report|2004 109 Chapter 7 Financial situation Table 7.4 NET ISSUANCE OF SECURITIES BY RESIDENTS IN THE EXTERNAL AND INTERNAL MARKETS BY TYPE OF INSTRUMENT EUR million 2002 2003 2004 Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9489 Government securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6583 Commercial paper, Treasury bills and other short-term securities (excluding CEDICs)(a) . . . . . . . -1937 CEDICs(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 860 Fixed rate Treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9422 Variable rate Treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1778 Other government securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Commercial paper and other short-term securities (except general government) (b) . . . . . . . . . . . . . . 2904 Classical bonds (excluding bonds issued by the general government and asset-backed bonds) . . . . 662 Cash certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -230 Convertible bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700 Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Asset-backed bonds(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42 Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1088 Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6005 Listed companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1012 Non-listed companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4993 Investment units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1315 Securitisation units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2577 6519 4457 3810 130 1356 -946 107 -924 352 2157 -168 -139 1765 0 -981 4734 963 3771 2265 8798 8140 6580 6094 825 442 -658 -123 1682 230 906 -450 -75 182 4 -917 5390 1620 3770 1999 4395 Source: Banco de Portugal. Notes: (a) CEDICs – short-term special debt certificates issued by the State, chiefly intended for investments of treasury surpluses of general government entities. (b) Including commercial paper issued at over 1 year. (c) See Decree-Law no 453/99 of 5 November, as amended by Decree-Law no 82/2002 of 5 de April. (2) Net of CEDICs (short-term special debt certificates issued by the State, chiefly intended for investments of treasury surpluses of general government entities). 110 Chart 7.8 EURO YIELD CURVE 5.0 31-12-2003 31-03-2004 30-09-2004 31-12-2004 4.5 4.0 Per cent net issues of debt by non-financial corporations reached approximately €1.6 billion in 2004, compared with net repayments of around €1.4 billion in 2003, while net issues of debt by the general government increased by approximately €1.4 billion in 2004(2). Net issues of debt securities by resident financial corporations were not significant in 2004, since the Portuguese financial groups continued to be fund themselves in international debt markets through subsidiary special-purpose vehicles having their head office abroad. Net issues of cash bonds, in turn, targeted at retail investors in the domestic market, declined to less than half the level attained in the previous year, reflecting the option of some financial groups to collect deposits whose effective interest rate increases with the holding period (i.e., with “fidelity premium”). Issues by the general government and by non-financial corporations concentrated more 3.5 3.0 2.5 2.0 1.5 1 2 3 4 5 6 7 8 9 Maturities (years) 10 11 12 13 14 15 Sources: Reuters and Banco de Portugal. on the short-term segment than in the previous year. In 2004 the slope of the yield curve continued to be rather steep, in spite of some narrowing of the differential between rates in the long-term segment and in the up-to-one-year Banco de Portugal |Annual Report|2004 Chapter 7 Financial situation segment (Chart 7.8). Therefore, the issue of Treasury bills by the general government increased further, while the return of non-financial corporations to the debt securities market focused on commercial paper segment that had posted net repayments in 2003. In contrast, issues of the financial sector were concentrated on the medium and long-term segments, continuing the process of gradually lengthening the maturity of debt of this sector. 16 14 12 Banco de Portugal|Annual Report|2004 10 8 6 4 2 7.3.1 Households 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 -2 Sources: INE and Banco de Portugal. Chart 7.10 INDEBTEDNESS AND INTEREST PAYABLE As a percentage of disposable income 120 Indebtedness 8 Interest paid (right-hand scale) Per cent In 2004 the historically low level of interest rates, as well as supply-side factors in the credit market and the recovery in consumer confidence, favoured debt accumulation and discouraged household savings. In fact, strong acceleration in private consumption caused an interruption in the adjustment process of expenditure started in 2001. This discontinuation was visible in the decline in the household savings rate and corresponding net financial savings, and was mainly reflected in continued relatively high debt growth, despite the stabilisation of net debt flows as a percentage of GDP. The net accumulation of financial assets by this sector followed the downward trend seen in the two previous years (Chart 7.9). Successive reductions in interest rates, together with a competitive environment in the housing credit market that catalysed financial innovation, translated into an increasingly easier access of households to financing. Financial innovation, particularly in recent years, has involved the diversification of contracts offered in order to reduce debt-service costs during the early years of the contracts. This process also involves banks’ recourse to the securitisation of mortgage credit previously granted, which in practice reflects a disintermediation trend. However, in 2004, the impact of securitisation operations on bank liquidity was not very significant if one excludes securitisation operations involving the repurchase, under the form of securities and by the same financial group, Net acquisition of financial assets Net incurrence of liabilities Financial saving 90 6 60 4 30 2 0 Per cent Non-financial resident institutional sectors As a percentage of GDP Per cent 7.3 Chart 7.9 FINANCIAL TRANSACTIONS OF HOUSEHOLDS 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sources: INE and Banco de Portugal. of credit sold. As a consequence of the decline in implicit interest rates, it was possible for households to increase further their indebtedness ratio when measured as a percentage of disposable income, while at the same time, and for the third year in a row, interest payments as a percentage of disposable income declined (Chart 7.10). Even though, over the past few years, capital repayments have accounted for a growing share of household disposable income, esti- 111 Chapter 7 Financial situation Chart 7.11 Chart 7.12 INTEREST-BEARING FINANCIAL ASSETS AND LIABILITIES OF HOUSEHOLDS INTEREST RECEIVABLE AND PAYABLE BY HOUSEHOLDS(a) As a percentage of GDP As a percentage of GDP 150 Liabilities (inverted scale) Assets Net assets Interest payable (inverted scale) Interest receivable Net interest 10 8 100 6 Per cent Per cent 50 0 4 2 0 -2 -50 -4 -100 -6 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sources: INE and Banco de Portugal. mates indicate that overall debt-service costs are not increasing. Given the trend to lengthen the maturity of loans, evidence suggests that overall debt-service costs decreased as a percentage of disposable income in 2004, which is compatible with the absence of increases in defaults in these liabilities. However, although total interest-bearing assets continue to exceed interest-paying liabilities, estimates for interest receivable and payable by households point to a decline in the corresponding balance in 2004, which has been clearly negative since 2001 (Charts 7.11 and 7.12). The significant growth in household debt in the second half of the 1990s, which placed indebtedness ratios among the highest in the European Union (EU), was accompanied by an increase in net worth (assets net of liabilities) by this sector, taking into account just financial wealth, or this and estimates for real assets (to a large extent the value of housing owned by households) (see “Box 7.1 Developments in household wealth since the 1980s”). However, the ratio of assets to liabilities has gradually declined, which, in a context of interest rate rises and/or increases in unemployment in the future, raises doubts as to the household sector ability to maintain the expenditure levels observed in recent years. 112 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sources: INE and Banco de Portugal. Note: (a) Interest payable (receivable) differs from interest actually paid (received) chiefly because the former refers to accrued interest at the interest rate agreed for a given period, irrespective of wether the interest payment (receipt) date occurs prior to or after the end of the period considered. In 2004 the flow of bank deposits held by households recovered significantly compared with 2003, when they had remained practically unchanged. In effect, the weight of bank deposits in total assets of this sector, which had declined during the financial liberalisation process in Portugal, virtually stabilised in 2004. The environment of very low nominal interest rates has not favoured more traditional investments, mainly because interest rates on bank deposits in Portugal tend to have revision periods between 6 months and 1 year, which in the current juncture implies negative real earnings. Therefore, in 2004 the increase in household deposits seems to have been related to banks’ efforts to increase the remuneration of deposits with higher ex-post effective maturity, by offering deposit contracts with a fidelity premium or provisions that make it compulsory to invest simultaneously in other financial instruments (e.g. investment funds). Banco de Portugal / 2004 Annual Report Chapter 7 Financial situation Chart 7.13 Chart 7.14 FINANCIAL TRANSACTIONS OF NON-FINANCIAL CORPORATIONS TOTAL DEBT OF NON-FINANCIAL CORPORATIONS As a percentage of GDP As a percentage of GDP TOTAL excluding FDI of corporations having their head-office in Madeira offshore+trade credit TOTAL excluding FDI of corporations having their head-office in Madeira offshore TOTAL Net acquisition of financial assets (a) Net incurrence of liabilities (a) Financial saving 25 Interest paid (right-hand scale) 20 120 8 7 10 5 0 6 5 60 4 3 30 Per cent 90 Per cent Per cent 15 2 -5 1 0 -10 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sources: INE and Banco de Portugal. Note: (a) 2001-2004: adjusted for transactions of corporations having their head-office in offshores. 7.3.2 Non-financial corporations The increase in net borrowing requirements of non-financial corporations in 2004 was reflected in an accumulation of financial liabilities that was much more significant than in the previous year, given that the accumulation of financial assets, virtually stabilised when measured as a percentage of GDP (Chart 7.13). In terms of non-financial operations, current savings of non-financial corporations, which mainly reflect profits net of dividends distribution, declined by more than 1 p.p. of GDP in 2004. Developments in corporate investment, which increased only slightly as a percentage of GDP, were not the major cause behind the decline in corporate savings. The latter seems to be largely associated with the rise in wages and tax costs, as well as with the increase in oil prices (which translates into higher energy utilisation costs) and other commodities, such as iron and steel. However, profits of companies listed in the stock market, where major companies of the non-tradable sector are represented, recovered very significantly, while reductions in profit margins and Banco de Portugal|Annual Report|2004 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sources: INE and Banco de Portugal. in Portuguese export market shares signal competitive difficulties of the tradable sector in external markets. In 2004 the ratio of gross debt of non-financial corporations to nominal GDP grew very slightly, following the virtual stabilisation seen in the previous year (Chart 7.14)(3). The high contribution of trade credits granted by nonresidents to debt developments in this sector is associated with the increase in corporations’ working capital associated with import funding. This rise in credit granted by import suppliers mainly reflects a strong recovery in the consumption of durable goods and, to a lesser extent, in investment in equipment, which are expenditure components with a strong import content, given that average deadlines for payment and collection in international trade remained virtually stable. In turn, despite a recovery in flows of debt securities issued by non-financial corporations,—which concentrated on short-term securities, namely com- (3) This debt concept includes debt formalised in the credit market, i.e. total loans (excluding loans granted to companies having their head office in Madeira and Santa Maria offshore centres by non-resident corporations belonging to the same economic group) and debt securities, plus trade credits. 113 Chapter 7 Financial situation mercial paper—, total debt in financial markets decelerated from the previous year, reflecting low growth of credit granted by resident financial institutions to this sector. 7.3.3 General government In 2004 government debt as a percentage of GDP increased by 1.8 p.p., chiefly as a result of the issuance of short-term securities, namely Treasury bills. The general government sector continued to take advantage of the marked slope of the yield curve to reduce interest payments. In fact, total financial liabilities of the general government, whose interest payments are indexed to short-term interest rates (namely commercial paper, Treasury bills and savings certificates) accounted for around one quarter of total debt at the end of 2004, which compares with around 19 per cent one year earlier. This financing strategy was largely responsible for a reduction in the interest rate implied in government debt, by around 20 basis points from the previous year. Therefore, despite the increase in debt stock, the weight of interest rates on GDP declined slightly (by around 0.1 p.p.), to 2.8 per cent. The importance of the non-resident sector as the main holding sector of Portuguese general government debt increased further (now accounting for around 62 per cent of the total). The increase in the weight of non-residents in 2004 (by approximately 5 p.p.) reflects a long-term trend associated with the process of financial integration of the Portuguese economy, which intensified with participation in the euro area. As an illustration, at the end of 1996 non-residents held only 20 per cent of government debt (against around 38 per cent at the end of 1998 and around 47 per cent in 1999). In tandem with these developments, there has been a diversification of the resident institutional investors’ portfolio, namely via the purchase of government debt of other euro area countries, which already accounts for the greater share in these investors’ portfolio. 114 7.4 Financial intermediaries 7.4.1 Banking system In 2004 developments in the banking system posted a further improvement in the liquidity, solvency and credit quality indicators. In turn, profitability indicators stood at slightly lower levels than in the previous year, but clearly higher than in 2002, a particularly adverse year for banking activity in continental Europe. The slight decline in bank profitability in 2004 was due to the reduction in the net interest income and extraordinary gains, only partly offset by the recovery in activity more linked to capital markets, the increase in commissions and the lower accumulation of credit overdue (Table 7.5). This contrasts with the period ended in 2002, which was characterised by growing materialisation of credit risk in the resident non-financial private sector (albeit relatively limited when compared with the same stage of the previous cycle) and by severely depressed quotations of listed companies. Moreover, in 2004 the Portuguese banks’ liquidity improved further, characterised by the lengthening of debt maturities, while solvency indicators followed the gradual improvement started in 2001. The year-on-year rate of change of total assets in the Portuguese banking system on a consolidated basis(4) stood at around 4 per cent at the year-end. The moderation in asset growth reflected the decline in overall interbank activity (including central bank investments/resources), given that loans and securities portfolios, when taken together, accelerated from the previous year (growth rate of 5.9 (4) Unless otherwise indicated, the aggregate considered for the Portuguese banking system covers all banks (including Montepio Geral Savings Bank), other savings banks and mutual agricultural credit banks, excluding banks having their head office or whose activities are exclusively based on Madeira offshore and/or carrying on their activity chiefly with non-residents. Branches of credit institutions having their head office in another EU Member State (except those that are not classified as MFIs), as well as branches of credit institutions having their head office in non-EU countries are also considered as banks and included in this aggregate. Banco de Portugal |Annual Report|2004 Chapter 7 Financial situation Table 7.5 BANKING SYSTEM BALANCE SHEET On a consolidated basis End-of-period values As a percentage of average assets Year-on-year rate of change 2002 2003 2004 2002 2003 2004 Cash and assets in central banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit to other credit institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . in the country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit to customers (net of provisions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities and financial fixed assets (net of provisions). . . . . . . . . . . . . . . . Fixed-income(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Variable income(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 10.7 3.4 7.3 68.6 11.4 7.4 4.0 6.2 5.1 10.8 2.6 8.2 65.6 12.3 8.7 3.6 6.2 2.7 11.4 2.9 8.5 65.5 14.1 10.1 3.9 6.3 -12.9 -10.6 -25.0 -1.9 7.0 -10.6 -14.1 -3.3 5.1 76.1 8.4 -16.7 20.0 2.7 16.6 26.3 -1.4 9.9 -44.0 10.0 15.9 8.1 3.6 18.3 21.1 11.6 8.5 Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 1.6 7.4 3.8 Resources from central banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Resources from other credit institutions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . in the country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Resources from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities represented by securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 19.3 2.7 16.5 53.8 13.7 3.1 1.2 2.9 5.6 1.0 17.9 1.8 16.1 51.7 16.4 2.9 1.1 3.1 5.8 1.2 15.6 2.3 13.3 51.9 17.8 2.9 1.1 3.3 6.1 -53.6 -4.4 -30.0 1.8 1.4 17.3 8.0 4.7 -5.5 2.5 145.0 0.1 -28.3 4.8 3.4 28.8 1.9 -4.1 14.0 11.1 23.9 -9.8 28.0 -14.1 4.1 12.8 3.7 3.6 9.7 10.3 PROFIT AND LOSS ACCOUNT On a consolidated basis As a percentage of average assets Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from financial operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other operational profits (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Extraordinary gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation for the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on profit for the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before minority interests (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Memo (per cent): Ratio of credit to resources from customers. . . . . . . . . . . . . . . . . . . . . . . . . . Coverage of interbank liabilities by highly liquid assets . . . . . . . . . . . . . . . Ratio of non-performing loans to gross credit. . . . . . . . . . . . . . . . . . . . . . . . Credit and interest overdue, net of specific provisions (as a percentage of credit net of specific provisions) . . . . . . . . . . . . . . . . . Return on equity (before minority interests) . . . . . . . . . . . . . . . . . . . . . . . . . Capital adequacy ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in percentage points 2002 2003 2004 2002 2003 2004 2.12 0.63 0.16 0.36 3.26 1.69 0.06 0.24 0.61 0.13 0.65 2.00 0.69 0.18 0.34 3.34 1.69 0.06 0.23 0.57 0.13 0.78 1.94 0.76 0.16 0.37 3.34 1.68 -0.01 0.22 0.55 0.10 0.76 -0.12 0.00 0.00 -0.02 -0.15 -0.04 0.05 0.00 0.16 -0.03 -0.19 -0.12 0.07 0.02 -0.02 0.08 0.00 0.00 -0.01 -0.04 0.00 0.13 -0.06 0.07 -0.02 0.03 0.00 0.00 -0.07 -0.01 -0.02 -0.03 -0.02 127.7 87.4 2.26 126.9 100.7 2.40 126.2 104.3 1.98 6.7 -4.1 0.14 -0.8 13.4 0.14 -0.7 3.6 -0.42 0.85 11.7 9.8 0.66 13.9 10.0 0.34 12.8 10.4 -0.56 -3.2 0.2 -0.19 2.2 0.2 -0.33 -1.1 0.4 Source: Banco de Portugal. Notes: For more detailed information, see the Financial Stability Report 2004 of Banco de Portugal. (a) Debt securities. (b) Shares and other equity, including financial fixed assets. (c) Income before minority interests enables a more accurate measure of income generated by all consolidated assets and, therefore, it should be used in order to compare income with profitability on an individual basis. per cent, which compares with around 3 per cent in 2003, adjusted for the change in the consolidation perimeter in that year)(5). In 2004 se- Banco de Portugal|Annual Report|2004 curitisation operations conducted by financial institutions were dominated by one securitisation operation of housing credit in the second 115 Chapter 7 Financial situation half of the year. It was crossed with the repurchase, by the originator banking group, of the fixed-income securities issued by a non-resident special purpose vehicle representing the credit initially sold(6). This “cross” repurchase of securities resulting from securitisation operations had already occurred in 2003, but in that year it had accounted for less than half of total securitised credits. Excluding this type of transactions, the rate of change of credit in the balance sheet exceeded the value in the credit portfolio by around 1.5 p.p. and 2 p.p. respectively in December 2004 and December 2003. Loans to households for house purchase have been the most buoyant segment in credit activity. In 2004 the number of housing credit contracts increased by almost 4 per cent from the previous year(7). This indicator covers all contracts made, which means that in addition to new indebtedness it also includes transfers of contracts between institutions. The total amount of the contracts grew, in gross terms, by around 11 per cent, which translates into a significant rise in the average value of contracts and, most likely, into an increase in the average ratio of the amount of each loan to the value of the corresponding collateral, given the moderate developments in average housing prices implied in available indices. These developments reflect the strategies adopted by credit institutions to expand housing credit, as well as demand-side factors associated with historically low levels of nominal and real interest rates. In fact, banks have introduced new types of contracts with a view to decreasing the weight of initial instalments, namely by defer- (5) See Section II.8.3. Banking activity in the 2003 issue of the Annual Report of Banco de Portugal. (6) In fact, the originator banking institution purchased all securities issued by the (non-resident) ‘vehicle’ in order to fund the purchase of loans (by the latter). Therefore, in practice the risk profile of the originator institution’s loan portfolio did not change significantly, despite the positive consequences of the operation on the institution’s liquidity. This was namely due to the fact that purchased securities are potentially eligible as collateral for monetary policy operations. (7) Source: Directorate-General of the Treasury. 116 ring the repayment of loans. Moreover, interest rate margins in this segment have gradually declined, in contrast to loans to households for other purposes and loans to non-financial corporations, whose annual average interest rate margins rose slightly from 2003(8). According to the results of the Bank Lending Survey, these developments were due to a more competitive environment in loans for house purchase and a gradual improvement in the outlook for overall economic activity and for developments in the housing market (as expectations regarding the value of real collateral used in this segment became more favourable). At the end of 2004 nominal rates of change in loans granted by resident financial institutions to non-financial corporations stood at around 2.5 per cent (i.e., close to zero in real terms). In the first half of the year conditions applied by banks in the approval of loans to this sector were tightened. But evidence suggests that institutions gradually reversed that trend in the second half of the year, namely by applying lower spreads to loans to average risk corporations and by lengthening the maturity of loans. This reflects, on the one hand, less negative expectations with regard to overall economic activity and to specific sectors and companies, and on the other hand, increased competition also in this segment. Data available for the sectoral breakdown of loans to non-financial corporations point to an increase in the weight of loans to the construction and services sectors at the end of 2004. In the services sector, the “real estate activities” sub-sector contributed the most to the increase in loans. In line with developments in recent years, above average growth in credit to construction and real estate activities, and more importantly of credit to households for house purchase, implied an increase in the concentration of credit risk in sectors related to the real estate market. During the low stage of the current business cycle, credit institutions have focused less on (8) Despite the slight increase in annual average terms in 2004, margins in these segments declined from the second quarter onwards. Banco de Portugal |Annual Report|2004 Chapter 7 Financial situation lending to households for other purposes, even though this type of credit has been growing more than disposable income since late 2003. In fact, while in 2002 credit outstanding declined, in 2003 it gradually accelerated, maintaining a relatively sustained rate of growth at around 5 per cent in 2004. While, strong growth of private consumption is consistent with these developments - either leading to the direct financing of consumption expenditure through credit, or implying an increase in working capital needs of small businesses classified under households, i.e. sole proprietors -, the results of the Bank Lending Survey indicate that, in contrast to loans for house purchase and to non-financial corporations, banks did not ease their standards applied to the approval of loans to this segment. Interest margins on loans to households for other purposes narrowed very slightly after the second quarter of 2004, although they increased in annual average terms. This confirmed that banks did not ease significantly their standards for the approval of loans to households without real collateral. In particular, the price continued to reflect the higher risk of these credits, compared with average portfolio risk. At the end of 2004 ratios of credit with default and/or non-performing loans were clearly lower than at the end of 2003. Ratios of credit overdue(9) and credit with default(10) to total credit declined by 0.4 p.p., standing at 1.98 and 2.09 per cent respectively. Data available indicate that the recovery from difficulties in payment capacity was particularly significant in the case of credit to non-financial corporations, extending to all sectors of activity, to companies of different sizes and across the entire default intensity spectrum. However, this result is significantly influenced by writeoffs/write-downs of credit recognised as definitely uncollectable, which have been less important in the case of loans to households. Ad- (9) Data on a consolidated basis, on defaults defined as payments at least 30 days behind deadline. (10) Defined as total credit overdue for over 90 days and non-performing loans equivalent to credit overdue according to Circular Letter No 99/03. Banco de Portugal|Annual Report|2004 justed for these effects, the resulting indicators - ratios of credit overdue and of credit with default net of provisions to credit also net of provisions - also point to lower risk in the credit portfolio in 2004. Moreover, data available indicate that major banking groups intensified their efforts to recover credit, including credit recognised as definitely uncollectable in previous years. At the end of 2004 the securities and financial fixed assets portfolio of banks grew by around 18 per cent. Fixed income securities issued by non-residents contributed the most to these developments, reflecting the purchase by resident banking institutions of securities stemming from a securitisation operation of mortgage credit conducted at the end of 2004. Nevertheless, even excluding the effect of this operation, the securities and financial fixed assets portfolio grew significantly, suggesting that the securities portfolio continued to be replenished in 2004, similarly to 2003(11). Portfolio developments also benefited from the rise in stock market prices, due both to the register of holding gains on the trading portfolio and to capital gains on other portfolios (valued at historical cost) and subsequent re-investment in the stock market. Banks continued to issue high volumes of securities, particularly bonds, in international financial markets via subsidiaries abroad. In contrast, the decline in net recourse to interbank markets (typically short-term) that started in 2003 was more marked in 2004, contributing to the improvement in the banking system’s liquidity situation. In line with this, resources from resident customers went up, both as deposits and securities, while the growth rate of deposits from non-resident customers remained relatively high. In terms of the profit/loss account, in 2004 gross income increased by 4 per cent from the previous year. This was mainly due to significant growth in commissions that, in gross terms (i.e., only taking into account commis(11) In 2002, due to adverse conditions in their financing sources, Portuguese banks had to sell part of their securities portfolio in order to obtain financing. 117 Chapter 7 Financial situation 118 Chart 7.15 INVESTMENT FUND YIELDS Real-estate funds Money market and other high liquidity funds Mutual fund (excluding high liquidity funds) 9 6 Per cent sions received), increased by around 13 per cent. Reflecting the decline in average levels of (lending and deposit) bank interest rates, interest received and paid recorded declines that, combined, led to a slight narrowing of the net interest income. In addition to developments in commissions, there was some recovery in credit recognised as definitely uncollectable and previously written off from assets, and an increase in other profits associated with the supply of different services that are not classified as bank charges. Credit institutions have opted for the supply of services not associated with the capital market and, in particular, for the gradual charge of commissions for services that were previously free of charge, in order to adapt themselves to the low interest rate environment prevailing in Portugal since entry into the euro area. Portuguese banks had already reached favourable cost ratios by international comparison. In 2004 they continued to focus on restraining costs, namely by developing less labour-intensive administrative and communication structures, which contributed to a decline in the ratio of administrative costs to gross income. In 2004 the average solvency ratio of the Portuguese banking system followed the gradual upward trend started in 2001. For the second year in a row, own funds of the banking system increased slightly over 10 per cent, reflecting significant efforts to improve the capital structure of institutions. These developments were due to equity increases and the recovery of reserves (the latter reflecting gains associated with the disposal of holdings) and to greater recourse to the issuance of hybrid securities (non-redeemable, non-voting preferred shares) eligible as base own funds. Conversely, financing costs of employees’ pensions had an extraordinary increase. There was a revision of actuarial assumptions when calculating banks’ liabilities with these pensions, and costs attributable to previous fiscal years were posted under both reserves and earnings, namely those costs associated with early retirements of employees, whose contributions to pension funds are to be payable immediately. 3 0 -3 -6 1999 2000 2001 2002 2003 2004 Source: APFIPP. Note: The yields shown are based only on investment funds generated by management companies associated with APFIPP, which nonetheless account for nearly all funds. 7.4.2 Institutional investors In 2004 the returns obtained by mutual funds, money market funds and real estate funds were lower than in the previous year (Chart 7.15). Concentration in this activity remained rather high (the three major management companies managed more than half of the assets), although its trend decline pursued, reflecting the growth of the most recent management companies. Net subscriptions of mutual funds remained at high levels in 2004, but declined slightly from the previous year. In particular, and as in 2003, there were high flows to bond funds, as opposed to significant net redemptions in money market and other high liquidity funds. As regards the latter, net subscriptions were very significant in 2001 and 2002, reflecting the uncertainty prevailing in those years in financial markets and lower investors’ willingness to take on risk. In 2004 investments in these funds were replaced by time deposits (these low-risk and high-liquidity funds are the closest substitute for time deposits), as the relative remuneration between these two instruments has been favourable to the collection of deposits. Banco de Portugal |Annual Report|2004 Chapter 7 Financial situation and continued to mainly comprise bonds, namely bonds issued by non-residents (Chart 7.16). Real estate investment funds, which by definition place their resources almost exclusively in real estate or other similar holdings, have been increasing very significantly over the past few years (Chart 7.17). In fact, assets managed by these funds more than doubled between December 2000 and December 2004. This compares with cumulative growth in total mutual funds and money market funds of around 20 per cent, over the same period(13). In 2004 growth was more marked, with an increase of 42 per cent in the net subscriptions of these funds, accounting for around half of total fund subscriptions. In 2004 the flows of household rights associated with life insurance and pension funds (adjusted for the transfer of funds from public en- Moreover, the stock market valuation, together with the reaction to legislative changes to abolish tax benefits related to Retirement Savings Schemes and Stock Savings Schemes in 2005, should have been also behind investments in funds channelled to the stock market, although to a much smaller extent (Table 7.6). Finally, in the last quarter of 2003, legislation was passed for the setting up of two new types of funds (flexible funds and special investment funds)(12), which posted very strong net subscriptions in 2004. Despite these developments, the structure of the investment fund portfolio did not undergo significant changes, (12) Special investment funds are non-harmonised funds, i.e. funds that are not constituted according to rules defined in Title III of the Legal Framework of Collective Investment Undertakings approved by Decree-Law No 252/2003, of 17 October. This means that, in addition to securities, these funds may invest in other assets, namely non-financial assets. Flexible funds are funds that have no commitments regarding their asset composition in the corresponding instruments of incorporation. (13) Figures adjusted for holdings of resident investment funds units. Table 7.6 FUNDS RAISED BY RESIDENT INSTITUTIONAL INVESTORS EUR million Dec 1999 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension funds (a) Net contributions (b) . . . . . . . . . . . . . . . . . . . Life insurance (a) . . . . . . . . . . . . . . . . . . . . . . . . . Net contributions . . . . . . . . . . . . . . . . . . . . . Investment funds(c) Net subscriptions: Money market funds . . . . . . . . . . . . . . . . . Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . Real-estate funds . . . . . . . . . . . . . . . . . . . . . Memo: Deposits of the resident non-monetary sector(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings certificates . . . . . . . . . . . . . . . . . . . . 2000 2001 2002 2003 2004 2004 Outstanding amounts n.d. n.d. 5119 6304 5591 5207 73886 849 840 1704 2073 815 720 15191 2971 2195 2379 2917 2512 2488 26334 - - 54 304 678 501 44 770 385 1220 660 1 1060 938 1075 23627 7660 8879 485 10775 1177 6942 1071 1377 793 2419 318 3184 49 148847 15903 Source: Banco de Portugal. Notes: (a) The amount outstanding of December 2004 corresponds to the technical reserves of insurance and pension funds, as a measure of the liabilities associated with life insurance instruments in the insurance sector and with the payment of pensions. Net contributions are proxied by the change in the above mentioned technical reserves. (b) Figures for 2003 and 2004 are adjusted for the transfer of assets from publicly-owned companies to the general government, as a counterpart of the future payment of pensions. In 2003, it included the transfer from the Post Office (€1300.0 million) and in 2004 the transfers from Caixa Geral de Depósitos (€2504.4 million), Navegação Aérea de Portugal (€235.7 million), Aeroportos de Portugal (€173.6 million) and Imprensa Nacional Casa da Moeda (€137.8 million). Banco de Portugal|Annual Report|2004 119 Chapter 7 Financial situation Chart 7.16 PORTFOLIO OF MUTUAL FUNDS AND MONEY MARKET FUNDS Development and structure by type of assets Chart 7.17 PORTFOLIO OF REAL-ESTATE FUNDS Development and structure by type of assets Shares and other equity - non-resident issuers Shares and other equity - resident issuers Securities other than shares - non-resident issuers Securities other than shares - resident issuers Currency and deposits Total assets (right-hand scale) 100 8000 20 40 Per cent 7000 EUR million 60 EUR billion 80 Per cent 9000 80 25 100 Other Real-estate and similar holdings Total assets (right-hand scale) 6000 60 5000 4000 40 3000 2000 20 1000 20 0 0 15 1999 2000 2001 2002 2003 0 Dec.99 Dec.00 Dec.01 Dec.02 Dec.03 Dec.04 2004 Source: Banco de Portugal. Sources: APFIPP and Banco de Portugal. Note: Data were adjusted for mutual fund units held by other funds. Chart 7.18 PORTFOLIO OF PENSION FUNDS(a) Development and structure by type of assets 120 100 Real-estate Investment fund units Shares and other equity Debt securities Currency, deposits and other assets Total assets (right-hand scale) 18 90 70 14 60 50 40 12 EUR billion 16 80 Per cent terprises to Caixa Geral de Aposentações) were very close to the previous year. In fact, pension funds in Portugal are mostly substitutes for public social security schemes and, as such, these funds have a “defined benefit” (i.e. they imply a fixed pension on the retirement date) and are compulsory at the level of the company/sector to which they apply. Unless in a given year actuarial assumptions to valuate liabilities for the payment of pensions are subject to strong revisions, or a significant volume of early retirements occurs, the change in the above mentioned liabilities will be relatively stable. Indeed, individual and discretionary demand for these instruments is not yet relevant in Portugal. In terms of pension fund portfolio, there was a rise in the weight of shares and mutual fund units, as opposed to a decline in deposits. This is likely associated with increases in the value of these instruments in capital markets. The outstanding amount of pension-fund managed assets (and corresponding liabilities) declined in 2004, as a result of the transfers from the pension funds of public corporations to the Caixa Geral de Aposentações (Chart 7.18). In turn, demand for life insurance has been mainly driven by the requirement of 30 20 10 10 0 8 1999 2000 2001 2002 2003 2004 Source: Instituto de Seguros de Portugal. Note: (a) Figures for 2004 are provisional. credit institutions that individuals contracting housing credit subscribe life insurance policies. This has contributed to the significant increase over the last decade in the weight of assets associated with life insurance and pension funds in the financial asset portfolio of household (see “Box 7.1 Developments in household wealth since the 1980s”). Banco de Portugal |Annual Report|2004 Chapter 7 Financial situation Box 7.1 DEVELOPMENTS IN HOUSEHOLD WEALTH SINCE THE 1980s The analysis of developments in household wealth is relevant because changes in wealth affect households’ consumption and investment decisions and influence the operation of financial markets and developments in the financial system. As such, this box reports the results of a study recently published by Banco de Portugal, which presents estimates for financial wealth (financial assets and liabilities) and for the housing component of household non-financial wealth for 1980-2004 (1). Household wealth as a percentage of disposable income has moved up over the past 25 years, particularly during the 1990s. Growth was more significant in financial wealth, leading to an increase in its weight vis-à-vis the housing component (Charts 1 and 2). Despite the very significant growth of household indebtedness over the past few years, net worth also evolved positively in the period considered, maintaining a rising profile up to the end of the 1990s and stabilising more recently. Chart 1 Chart 2 HOUSEHOLD WEALTH COMPOSITION OF HOUSEHOLD WEALTH As a percentage of disposable income As a percentage of total assets 100 550 90 80 500 70 450 200 400 160 350 120 300 80 250 1980 1983 1986 1989 1992 1995 1998 2001 2004 Source: Banco de Portugal. Per cent 240 Per cent Financial assets Housing Per cent 280 Housing Net financial assets Net worth (r.h.s.) Total wealth (r.h.s.) 60 50 40 30 20 10 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 Source: Banco de Portugal. Over the 1990s the buoyancy in the housing market translated into an upward trend in the housing stock value as a percentage of disposable income. Some demographic factors contributed to this buoyancy, namely the decline in the average size of households, and the consequent increase in the number of households. However, the increased value of the housing stock is mainly related to the decline in nominal and real interest rates, which made it possible for a growing number of households to purchase houses by recourse to credit and to use loans to fund growing shares of the housing value. In fact, between 1980 and 1992, the ratio of housing credit outstanding to housing stock value owned by households ranged from 4 to 8 per cent, while from 1993 onwards that ratio widened significantly, standing at around 39 per cent in 2004 (Chart 3). (1) For more details on the methodology and detailed series, see Cardoso, F. and Cunha, V. (2005), “Household wealth in Portugal: 1980-2004", Working Paper No. 04-05, Banco de Portugal. Banco de Portugal|Annual Report|2004 121 Chapter 7 Financial situation Chart 3 Chart 4 LOANS FOR HOUSE PURCHASE COMPOSITION OF PORTFOLIO As a percentage of the housing stock value As a percentage of financial assets 45 Currency and deposits Loans Investments fund shares 40 100 35 90 30 80 25 70 Per cent Per cent Securities other than shares Shares and other equity exc.IF Insurance technical reserves 20 15 60 50 40 30 10 20 5 10 0 1980 1983 1986 1989 Source: Banco de Portugal. 1992 1995 1998 2001 2004 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 Source: Banco de Portugal. The strengthening of the financial system, the downward path of interest rates and developments in social security schemes contributed to a higher diversification of households’ financial assets portfolio. Therefore, although all financial assets increased as a percentage of disposable income, the composition of financial assets changed. In particular, there was a gradual decline in the weight of deposits and an increase in the weight of other assets, particularly of insurance technical reserves, mainly associated with life insurance and pension funds (Chart 4). Nonetheless, the weight of these assets remains lower than in most other European countries. In fact, comparing the values for 2003, the weight of investments in securities, shares and other equity is identical in Portugal and in the euro area, but the currency and deposits component is significantly higher in Portugal, whereas the net equity in insurance technical reserves has a smaller weight (Table 1). Vis-à-vis European Union countries, the results of the comparison are similar, but a larger difference emerges concerning net equities in insurance technical reserves. However, average results mask considerable differences between individual countries. For instance, more than half of the financial investments of households in the Netherlands and the United Kingdom refer to net equities in insurance technical reserves, in line with the predominance of funded pension schemes in both countries. Comparing estimates for Portugal with data from other countries(2), there are also some differences both in the structure of net wealth and in its value as a percentage of disposable income (Table 2). However, developments since 1995 reveal some similar trends. Overall, from 1995 to 2000 there was an increase in household wealth as a percentage of disposable income, in both the housing and the financial components. This increase was more marked in financial wealth, resulting in a loss of importance of the housing component in total assets. From 2000 to 2003, the weight of financial assets declined in most countries considered (in some cases, such as the United Kingdom, its value in level even decreased), reflecting the decline of share prices in this period and, in some countries, a sharp valuation in housing. (2) This comparison was based on data from 1995 onwards, when there are financial wealth data available on a comparable basis for at least the European Union countries in the context of regular reports to Eurostat of Financial Accounts in accordance with ESA 95. Non-financial wealth data (in particular data on housing) are even scarcer and less harmonised. For this reason, the analysis of this component was made for a narrower group of countries. Comparative tables only include data up to 2003, the latest year for which there are financial accounts available for most countries. 122 Banco de Portugal |Annual Report|2004 Chapter 7 Financial situation Table 1 FINANCIAL ASSETS STRUCTURE IN 2003 As a percentage of total financial assets Shares and other equity Currency and deposits Securities other than shares Insurance technical reserves Of which: Total Investment fund units Total Of which: life ins. and pens. funds Portugal. . . . . . . . . . . . . . . . . Belgium . . . . . . . . . . . . . . . . . Denmark . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . . Spain . . . . . . . . . . . . . . . . . . . France . . . . . . . . . . . . . . . . . . Italy . . . . . . . . . . . . . . . . . . . . The Netherlands . . . . . . . . . Austria. . . . . . . . . . . . . . . . . . Finland . . . . . . . . . . . . . . . . . Sweden . . . . . . . . . . . . . . . . . United Kingdom . . . . . . . . . 44 32 28 36 42 31 27 25 56 35 20 27 11 19 8 12 3 2 22 4 8 1 3 1 27 29 17 22 39 36 35 11 16 41 40 16 9 16 9 12 13 10 17 4 10 5 12 5 17 19 46 30 16 31 15 60 21 23 37 56 16 17 44 28 15 28 13 58 14 20 37 54 Euro area(9)(a) . . . . . . . . . . . . European Union (12)(a) . . . . USA . . . . . . . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . . . . 33 31 16 56 11 8 6 6 29 26 48 11 11 9 10 2 27 34 30 27 25 32 30 27 Sources: Eurostat, national central banks and European statistical offices, Observatoire de L’Épargne Européenne, Federal Reserve Board, Cabinet Office (Government of Japan) and Banco de Portugal. Note: (a) This table excludes Ireland, Luxembourg and Greece because the Financial Accounts in these countries are not in accordance with ESA95. This effect was also observed in Portugal, albeit to a lesser extent, partly due to a slight slowdown in the housing market over the period. In 2003, the weight of housing in total assets in Portugal was the lowest in the group of European countries considered. With regard to liabilities, although the respective weight has increased in several countries from 1995 to 2003, this trend was much more pronounced in Portugal, which in 2003 recorded the highest ratio of liabilities in total assets among the 8 countries for which estimates of housing wealth are available. Considering a wider group of countries, the indebtedness level in Portugal as a percentage of disposable income is only below that observed in Denmark, the Netherlands and the United Kingdom. The aggregate indicators do not make it possible to assess the financial situation of individual households. Some asymmetry can be expected in the distribution of wealth among households. According to a study recently published by Banco de Portugal(3), the distribution of wealth, in particular financial wealth, is very concentrated. For instance, according to sample data used in that study, 10 per cent of households held almost 74 per cent of financial assets in 2000. However, net worth for most households is positive given that a significant share of their liabilities refers to housing credit, which is collateralised by the corresponding value of the housing asset. (3) Farinha, L. and Noorali, S. (2005) “Debt and wealth of Portuguese households”, Banco de Portugal, Financial Stability Report 2004. Banco de Portugal|Annual Report|2004 123 Chapter 7 Financial situation Table 2 DEVELOPMENT IN HOUSEHOLD WEALTH As a percentage of total assets Housing Financial asset Liabilities 1995 2000 2003 1995 2000 2003 1995 2000 2003 Portugal. . . . . . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . . . . . . Spain . . . . . . . . . . . . . . . . . . . . . . . France . . . . . . . . . . . . . . . . . . . . . . Italy . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom . . . . . . . . . . . . . 49.7 55.4 65.2 49.0 64.9 36.6 44.3 51.8 63.4 45.2 53.6 39.0 44.7 50.6 72.0 52.3 60.8 49.0 50.3 44.6 34.8 51.0 35.1 63.4 55.7 48.2 36.6 54.8 46.4 61.0 55.3 49.4 28.0 47.7 39.2 51.0 12.8 19.2 10.8 13.5 4.3 17.9 21.4 20.1 12.4 12.0 5.6 14.7 24.6 19.7 11.9 12.1 5.7 18.0 Europe (6) . . . . . . . . . . . . . . . . . . . US . . . . . . . . . . . . . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . . . . . . . . 53.7 27.1 41.6 48.6 25.4 37.2 55.5 30.9 33.7 46.3 72.9 58.4 51.4 74.6 62.8 44.5 69.1 66.3 13.8 17.5 18.9 13.6 16.7 17.8 14.0 19.8 17.7 As a percentage of disposable income Liabilities (a) Financial asset 1995 2000 2003 1995 2000 2003 Portugal . . . . . . . . . . . . . . . . . . . . . . . . Belgium . . . . . . . . . . . . . . . . . . . . . . . . Denmark. . . . . . . . . . . . . . . . . . . . . . . . Germany. . . . . . . . . . . . . . . . . . . . . . . . Spain . . . . . . . . . . . . . . . . . . . . . . . . . . France(b) . . . . . . . . . . . . . . . . . . . . . . . . Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Netherlands . . . . . . . . . . . . . . . . . Austria . . . . . . . . . . . . . . . . . . . . . . . . . Finland . . . . . . . . . . . . . . . . . . . . . . . . . Sweden . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom . . . . . . . . . . . . . . . . 212 362 279 218 198 243 237 411 181 100 211 378 276 468 356 256 252 328 333 560 203 185 295 471 279 398 308 262 247 290 308 465 210 177 262 397 54 63 175 94 61 64 29 108 52 65 95 107 106 69 225 107 86 72 40 175 72 60 101 113 124 67 214 104 105 74 44 201 75 70 117 140 Europe (6). . . . . . . . . . . . . . . . . . . . . . . Europe (12). . . . . . . . . . . . . . . . . . . . . . US . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . 251 238 391 367 332 308 460 407 303 289 411 424 75 72 94 119 88 87 103 115 95 91 118 113 Sources: Eurostat, national central banks and European statistical offices, Observatoire de L’Épargne Européenne, Federal Reserve Board, Cabinet Office (Government of Japan) and Banco de Portugal. Notes: (a) The liability concept considered here is wider than the debt concept normally used by Banco de Portugal (which only takes into account interest-bearing liabilities), mainly due to the fact that it includes trade credits. Considering the more restrictive concept, ratios for Portugal are of 39, 91 and 110 per cent for 1995, 2000 and 2003 respectively. (b) The ratio of the housing value to the percentage of disposable income in 2002 (latest value available) was used to estimate the housing value for 2003. 124 Banco de Portugal |Annual Report|2004 Supplementary Responsáveis pelos Orgãos deTables Direcção e Delegações Supplementary tables Table A.1.1 WORLD ECONOMY – GROSS DOMESTIC PRODUCT Real rate of change, per cent Weight in world GDP 2004(a) 1997 1998 1999 2000 2001 2002 2003 2004 World economy(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 4.2 2.8 3.7 4.6 2.5 3.0 4.0 5.1 Advanced economies. . . . . . . . . . . . . . . . . . . . . . . . . . . . United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Newly industrialised Asian economies . . . . . . . . . . Euro area(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France ................................... Italy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Greece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54.6 20.9 6.9 3.1 3.5 15.3 4.3 3.1 2.9 1.7 0.9 0.6 0.5 0.4 0.3 0.3 0.3 0.1 3.4 4.5 1.7 3.3 5.5 2.4 1.9 1.9 2.0 4.0 3.9 3.5 1.8 3.7 4.0 6.3 10.7 8.3 2.6 4.2 -1.1 3.1 -2.6 2.8 1.8 3.6 1.7 4.3 4.3 2.0 3.6 3.3 4.6 4.9 8.9 6.9 3.5 4.4 0.0 2.9 7.3 2.8 1.9 3.2 1.7 4.2 4.0 3.2 3.3 3.4 3.8 3.4 11.1 7.8 3.8 3.7 2.4 3.9 7.9 3.6 3.4 4.2 3.2 4.4 3.5 3.9 3.4 4.5 3.4 5.2 10.0 9.0 1.2 0.8 0.2 2.3 1.3 1.6 1.3 2.1 1.7 2.8 1.4 0.7 0.7 4.2 1.7 1.1 6.0 1.6 1.6 1.9 -0.3 1.8 5.3 0.9 0.2 1.1 0.4 2.2 0.6 0.9 1.2 3.7 0.4 2.1 6.2 2.5 2.0 3.0 1.4 2.2 3.1 0.5 0.0 0.5 0.4 2.5 -0.9 1.2 0.8 4.7 -1.1 2.4 3.6 2.9 3.4 4.4 2.6 3.1 5.5 1.8 1.0 2.4 1.0 2.7 1.3 2.7 2.0 4.2 1.1 3.7 5.4 4.2 Emerging market and developing economies. . . . . . . Developing Asian countries . . . . . . . . . . . . . . . . . . . . China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Latin America(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Community of Independent States (CIS) . . . . . . . . . Central and Eastern Europe . . . . . . . . . . . . . . . . . . . . Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Middle East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45.4 24.6 13.2 7.5 2.6 3.8 3.4 3.3 2.8 5.3 6.5 8.8 5.2 3.3 1.1 4.2 3.2 4.8 3.0 4.1 7.8 2.3 0.1 -3.5 2.8 3.0 4.0 4.0 6.2 7.1 0.4 0.8 5.1 0.4 2.8 2.1 5.8 6.5 8.0 3.9 4.4 9.1 4.9 3.2 5.4 4.2 5.8 7.5 0.5 1.3 6.4 0.2 4.0 3.3 4.7 6.5 8.3 -0.1 1.9 5.4 4.4 3.6 4.1 6.4 8.1 9.3 2.2 0.5 7.9 4.6 4.6 5.8 7.2 8.2 9.5 5.7 5.2 8.2 6.1 5.1 5.5 Memo: European Union (EU25) . . . . . . . . . . . . . . . . . . . . . . . 21.1 2.6 2.9 2.9 3.6 1.8 1.1 1.0 2.4 Sources: IMF, Eurostat, European Commission, Thompson Financial Datastream, INE and Banco de Portugal. Notes: (a) Based on GDP valued at purchasing power parities. (b) Details about country aggregates and aggregation methodology can be obtained in www.imf.org. (c) Adjusted for seasonal and calendar effects for the euro area and the four major economies. (d) Corresponds to the aggregate “Western Hemisphere” defined by the IMF. Banco de Portugal | Annual Report | 2004 127 Supplementary tables Table A.1.2 WORLD ECONOMY – CONSUMER PRICES Rate of change, per cent Weight in world GDP 2004(a) 1997 1998 1999 2000 2001 2002 2003 2004 World economy(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 5.9 5.4 5.0 4.2 4.1 3.4 3.7 3.7 Advanced economies. . . . . . . . . . . . . . . . . . . . . . . . . . . United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Newly industrialised Asian economies . . . . . . . . . . Euro area(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France ................................... Italy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Greece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54.6 20.9 6.9 3.1 3.5 15.3 4.3 3.1 2.9 1.7 0.9 0.6 0.5 0.4 0.3 0.3 0.3 0.1 2.0 2.3 1.7 1.8 3.4 1.6 1.5 1.3 1.9 1.9 1.9 1.5 1.2 5.4 1.9 1.2 1.2 1.4 1.5 1.5 0.6 1.6 4.6 1.1 0.6 0.7 2.0 1.8 1.8 0.9 0.8 4.5 2.2 1.4 2.1 1.0 1.4 2.2 -0.3 1.4 0.0 1.1 0.6 0.6 1.7 2.2 2.0 1.1 0.5 2.1 2.2 1.3 2.5 1.0 2.2 3.4 -0.9 0.8 1.2 2.1 1.4 1.8 2.6 3.5 2.3 2.7 2.0 2.9 2.8 3.0 5.3 3.8 2.1 2.8 -0.7 1.2 2.0 2.3 1.9 1.8 2.3 2.8 5.1 2.4 2.3 3.7 4.4 2.7 4.0 2.4 1.5 1.6 -1.0 1.3 1.0 2.3 1.3 1.9 2.6 3.6 3.9 1.6 1.7 3.9 3.7 2.0 4.7 2.1 1.8 2.3 -0.2 1.4 1.5 2.1 1.0 2.2 2.8 3.1 2.2 1.5 1.3 3.4 3.3 1.3 4.0 2.5 2.0 2.7 0.0 1.3 2.4 2.1 1.8 2.3 2.3 3.1 1.4 1.9 2.0 3.0 2.5 0.1 2.3 3.2 Emerging market and developing economies. . . . . . . Developing Asian countries . . . . . . . . . . . . . . . . . . . . China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Latin America(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Community of Independent States (CIS) . . . . . . . . . Central and Eastern Europe . . . . . . . . . . . . . . . . . . . . Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Middle East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45.4 24.6 13.2 7.5 2.6 3.8 3.4 3.3 2.8 11.5 4.9 2.8 11.5 6.9 18.1 51.4 13.4 8.6 11.1 7.9 -0.8 8.6 3.2 23.7 32.7 9.0 8.4 10.2 2.6 -1.4 7.3 4.9 69.6 22.9 11.6 8.5 7.1 1.9 0.4 6.7 7.1 24.6 22.7 13.0 5.9 6.7 2.7 0.7 6.1 6.8 20.3 19.4 12.1 5.4 6.0 2.1 -0.8 8.9 8.4 13.8 14.7 9.8 6.5 6.0 2.6 1.2 10.6 14.8 12.0 9.2 10.6 7.1 5.7 4.2 3.9 6.5 6.6 10.3 6.6 7.7 8.3 Memo: European Union (EU25) . . . . . . . . . . . . . . . . . . . . . . . 21.1 2.6 2.1 1.6 2.4 2.5 2.1 1.9 2.1 Sources: IMF, Eurostat, European Commission, Thompson Financial Datastream, INE and Banco de Portugal. Notes: (a) Based on GDP valued at purchasing power parities. (b) Details about country aggregates and aggregation methodology can be obtained in www.imf.org. (c) Harmonised Index of Consumer Prices. (d) Corresponds to the aggregate “Western Hemisphere” defined by the IMF. Banco de Portugal | Annual Report | 2004 128 Supplementary tables Table A.1.3 WORLD ECONOMY – CURRENT ACCOUNT As a percentage of GDP Weight in world GDP 2004(a) 1997 1998 1999 2000 2001 2002 2003 2004 Advanced economies(b) . . . . . . . . . . . . . . . . . . . . . . . . . . United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Newly industrialised Asian economies . . . . . . . . . . Euro area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France ................................... Italy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Greece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portugal(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54.6 20.9 6.9 3.1 3.5 15.3 4.3 3.1 2.9 1.7 0.9 0.6 0.5 0.4 0.3 0.3 0.3 0.1 0.3 -1.6 2.2 -0.1 0.5 1.6 -0.1 2.5 2.8 0.4 6.2 5.4 -1.7 -2.1 -3.1 5.4 3.1 11.0 0.2 -2.4 3.0 -0.5 7.5 1.0 -0.3 2.4 1.9 -0.9 3.0 5.3 -0.8 -3.5 -4.7 5.7 0.8 9.4 -0.4 -3.2 2.6 -2.7 5.9 0.6 -0.8 2.6 1.0 -2.1 4.0 5.3 -1.0 -5.7 -6.3 6.2 0.3 8.9 -1.0 -4.2 2.5 -2.5 3.7 -0.1 -1.1 1.3 -0.2 -3.3 4.9 4.0 -1.0 -8.2 -8.9 7.2 -0.4 13.7 -0.8 -3.8 2.1 -2.3 5.0 0.4 0.4 1.5 0.3 -3.1 3.8 4.5 -0.4 -7.1 -9.1 6.9 -0.7 9.0 -0.8 -4.5 2.8 -1.7 5.5 1.0 2.4 1.5 -0.3 -2.7 2.8 5.8 2.5 -7.7 -6.0 7.4 -1.3 11.8 -0.8 -4.8 3.2 -1.8 7.4 0.5 2.4 0.4 -0.8 -3.3 2.7 4.4 1.5 -8.3 -3.3 4.3 -1.4 8.2 -1.0 -5.7 3.7 -1.9 7.1 0.6 3.8 -0.2 -0.4 -5.0 3.2 3.9 2.1 -7.8 -5.9 4.2 -1.3 6.3 Emerging market and developing economies. . . . . . . Developing Asian countries . . . . . . . . . . . . . . . . . . . . China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Latin America(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Community of Independent States (CIS) . . . . . . . . . Central and Eastern Europe . . . . . . . . . . . . . . . . . . . . Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Middle East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45.4 24.6 13.2 7.5 2.6 3.8 3.4 3.3 2.8 -1.4 0.4 3.8 -3.3 -3.8 -1.7 -3.6 -1.4 1.7 -2.0 2.6 3.3 -4.5 -4.2 -2.5 -3.0 -4.5 -5.0 -0.3 2.4 1.6 -3.2 -4.8 7.1 -4.3 -3.6 2.1 1.4 2.1 1.9 -2.4 -4.0 13.0 -5.3 1.5 11.0 0.7 1.8 1.5 -2.8 -4.6 7.9 -2.7 -0.3 6.1 1.3 2.9 2.8 -1.0 -1.7 7.0 -3.6 -1.7 4.6 2.1 3.1 3.2 0.4 0.8 6.4 -4.4 -0.3 8.3 2.9 3.3 4.2 0.8 1.9 8.5 -5.0 0.2 13.7 Memo: European Union (EU25) . . . . . . . . . . . . . . . . . . . . . . . 21.1 1.1 0.6 -0.1 -0.6 -0.1 0.4 0.1 0.2 Sources: International Monetary Fund, Eurostat, European Commission, Thompson Financial Datastream, INE and Banco de Portugal Notes: (a) Based on GDP valued at purchasing power parities. (b) Details about country aggregates and aggregation methodology can be obtained in www.imf.org. (c) Current account + capital account. (d) Corresponds to the aggregate “Western Hemisphere” defined by the IMF. Banco de Portugal | Annual Report | 2004 129 Supplementary tables Table A.1.4 ADVANCED ECONOMIES – UNEMPLOYMENT RATE Per cent 1997 1998 1999 2000 2001 2002 2003 2004 Advanced economies(a) . . . . . . . . . . . . . . . . . . . . . . . . . . United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Newly industrialised Asian economies . . . . . . . . . . Euro area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France ................................... Italy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Greece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8 4.9 3.4 6.9 2.6 10.6 9.1 11.5 11.3 17.0 4.9 9.2 4.4 9.8 12.7 9.9 2.7 6.7 4.5 4.1 6.2 5.4 10.0 8.8 11.1 11.3 15.2 3.8 9.3 4.5 10.9 5.0 11.4 7.5 2.7 6.4 4.2 4.7 5.9 5.3 9.2 7.9 10.5 10.9 12.8 3.2 8.6 3.9 12.0 4.4 10.2 5.6 2.4 5.8 4.0 4.7 5.4 3.9 8.2 7.2 9.1 10.1 11.3 2.8 6.9 3.7 11.3 3.9 9.8 4.3 2.3 5.9 4.8 5.0 5.0 4.1 7.8 7.4 8.4 9.1 10.6 2.2 6.7 3.6 10.8 4.0 9.1 3.9 2.1 6.4 5.8 5.4 5.1 4.1 8.3 8.2 8.9 8.6 11.3 2.8 7.3 4.2 10.3 5.0 9.1 4.3 2.8 6.6 6.0 5.3 4.9 4.3 8.7 9.0 9.5 8.4 11.3 3.7 8.0 4.3 9.7 6.3 9.0 4.6 3.7 6.3 5.5 4.7 4.7 4.1 8.8 9.5 9.7 8.0 10.8 4.6 7.8 4.5 10.5 6.7 8.8 4.5 4.2 Memo: European Union (EU25) . . . . . . . . . . . . . . . . . . . . . . . - 9.5 9.1 8.6 8.4 8.7 8.9 9.0 Sources: IMF, Eurostat, European Commission, Thompson Financial Datastream, INE and Banco de Portugal. Note: (a) Details about country aggregates and aggregation methodology can be obtained in www.imf.org. Banco de Portugal | Annual Report | 2004 130 Supplementary tables Table A.1.5 ADVANCED ECONOMIES – PUBLIC FINANCE INDICATORS As a percentage of GDP Fiscal balance Advanced economies(a) . . . . . . . . . . . . . . . . . . . . . . . . . . United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Newly industrialised Asian economies . . . . . . . . . . Euro area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Greece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Memo: European Union (EU25). . . . . . . . . . . . . . . . . . . . . . . . Public debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advanced economies(a) . . . . . . . . . . . . . . . . . . . . . . . . . . United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Newly industrialised Asian economies . . . . . . . . . . Euro area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France ................................... Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Greece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Memo: European Union (EU25). . . . . . . . . . . . . . . . . . . . . . . . 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 -4.3 -3.4 -4.7 -5.8 -1.4 -5.0 -3.3 -5.5 -7.6 -6.6 -4.1 -4.4 -5.7 -10.2 -5.5 -3.9 -2.1 2.5 -3.4 -2.5 -5.1 -4.2 -1.6 -4.3 -3.4 -4.1 -7.1 -4.9 -1.8 -3.8 -3.9 -7.4 -4.8 -2.9 -0.1 2.0 -1.9 -1.1 -3.8 -2.2 0.3 -2.7 -2.7 -3.0 -2.7 -3.2 -1.1 -1.9 -1.8 -6.6 -3.6 -1.3 1.1 2.9 -1.4 0.1 -5.5 0.1 -2.2 -2.3 -2.2 -2.7 -2.8 -3.0 -0.8 -0.6 -2.3 -4.3 -3.2 1.6 2.4 3.2 -1.0 0.6 -7.2 1.0 -3.2 -1.3 -1.5 -1.8 -1.7 -1.2 0.7 -0.4 -2.2 -3.4 -2.8 2.2 2.6 3.4 0.0 1.3 -7.5 3.8 -2.2 0.1 1.3 -1.4 -0.6 -0.9 2.2 0.2 -1.5 -4.1 -2.8 7.1 4.4 6.2 -1.5 -0.7 -6.1 0.7 -4.8 -1.7 -2.8 -1.5 -3.0 -0.5 -0.1 0.6 0.3 -3.6 -4.4 5.2 0.9 6.2 -3.4 -4.0 -7.9 -1.7 -3.4 -2.4 -3.7 -3.2 -2.6 -0.3 -1.9 0.1 -0.2 -4.1 -2.7 4.3 -0.4 2.3 -3.9 -4.6 -7.8 -3.4 -2.6 -2.8 -3.8 -4.2 -2.9 0.3 -3.2 0.4 -1.1 -5.2 -2.9 2.5 0.2 0.5 -3.5 -4.3 -7.1 -3.2 -1.6 -2.7 -3.7 -3.7 -3.0 -0.3 -2.5 0.1 -1.3 -6.1 -2.9 2.1 1.3 -1.1 - - - - - 0.8 -1.2 -2.3 -2.9 -2.6 72.6 92.3 51.8 73.6 57.0 54.6 124.3 63.9 77.2 134.0 68.8 108.8 64.3 57.0 82.0 6.7 72.3 99.2 52.3 75.2 59.8 57.1 123.1 68.1 75.2 130.2 68.4 111.3 62.9 57.1 73.5 7.2 69.9 105.8 50.6 75.0 61.0 59.3 120.5 66.6 69.9 124.8 64.6 114.1 59.1 54.1 64.6 6.8 66.2 117.9 47.5 74.3 60.9 59.5 116.7 64.6 66.8 119.6 65.0 112.4 55.0 48.6 53.7 6.3 62.8 131.0 45.0 72.9 61.2 58.5 115.5 63.1 63.1 114.8 67.3 112.3 54.3 47.0 48.6 5.9 57.1 139.2 42.0 70.4 60.2 56.8 111.2 61.1 55.9 109.1 66.7 114.1 53.3 44.6 38.3 5.5 56.6 148.9 38.8 69.6 59.4 57.0 110.7 57.8 52.9 107.9 67.1 114.8 55.9 43.8 35.8 7.2 58.6 158.5 38.3 69.5 60.9 59.0 108.1 55.0 52.6 105.4 66.7 112.1 58.5 42.5 32.6 7.5 60.5 164.7 39.7 70.8 64.2 63.9 106.3 51.4 54.3 100.0 65.4 109.3 60.0 45.3 32.0 7.1 61.0 169.4 41.6 71.2 66.0 65.6 105.8 48.9 55.7 95.7 65.2 110.5 61.8 45.1 29.9 7.5 - - - - 66.8 62.9 62.2 61.6 63.3 63.7 Sources: European Commission, INE, Ministério das Finanças and Banco de Portugal. Note: (a) Details about country aggregates and aggregation methodology can be obtained in www.imf.org. Banco de Portugal | Annual Report | 2004 131 Supplementary tables Table A.2.1 INTEREST RATES OF THE EUROPEAN CENTRAL BANK Per cent Date of the decision Main refinancing operations Marginal lending facility Deposit facility Magnitude of the change in the rate of the main refinancing operations (b.p.) 1998 22 December . . . . . . . . 3.00 4.50(a) 2.00(a) 1999 8 April. . . . . . . . . . . . . . 4 November . . . . . . . . . 2.50 3.00 3.50 4.00 1.50 2.00 -50 50 2000 3 February . . . . . . . . . . 16 March. . . . . . . . . . . . 3.25 3.50 4.25 4.50 2.25 2.50 25 25 27 April. . . . . . . . . . . . . 8 June(b). . . . . . . . . . . . . 31 August . . . . . . . . . . . 5 October . . . . . . . . . . . 3.75 4.25 4.50 4.75 4.75 5.25 5.50 5.75 2.75 3.25 3.50 3.75 25 50 25 25 2001 10 May . . . . . . . . . . . . . 30 August . . . . . . . . . . . 17 September . . . . . . . . 8 November . . . . . . . . . 4.50 4.25 3.75 3.25 5.50 5.25 4.75 4.25 3.50 3.25 2.75 2.25 -25 -25 -50 -50 2002 5 December . . . . . . . . . 2.75 3.75 1.75 -50 2003 6 March. . . . . . . . . . . . . 5 June . . . . . . . . . . . . . . 2.50 2.00 3.50 3.00 1.50 1.00 -25 -50 - Source: ECB. Notes: (a) Except in the period from 4 to 21 January 1999. During this period a narrow corridor of 50 basis points was applied between the interest rate for the marginal lending and the deposit facility (which stood at 3.25 and 2.75 per cent, respectively), aimed at facilitating the transition to the new monetary regime by market participants. (b) From this date onwards, the main refinancing operations take the form of variable rate tenders and the interest rate is the minimum rate at which counterparties may place their bids. Banco de Portugal | Annual Report | 2004 132 Supplementary tables Table A.2.2 MONETARY AND FINANCIAL CONDITIONS OF THE PORTUGUESE ECONOMY Averages, per cent Interest rates 3-month Euribor(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed rate treasury bond yields - 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate on outstanding amounts of loans to non-financial corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate on outstanding amounts of loans to households for house purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate on outstanding amounts of loans to households for consumption and other purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock market PSI Geral index (percentage change) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exchange rate Nominal effective exchange rate index (percentage change)(b) . . . . . . . . . . . EUR/USD exchange rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Memo: CPI (average rate of change) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 9.8 11.5 7.3 8.6 5.6 6.4 4.2 4.8 3.0 4.8 4.4 5.6 4.3 5.2 3.3 5.0 2.3 4.2 2.1 4.1 15.2 12.9 10.2 8.2 5.8 6.0 6.4 5.4 4.6 4.4 13.7 12.5 10.8 7.6 5.5 5.9 6.7 5.4 4.3 3.8 19.0 17.0 14.2 11.4 9.2 9.0 9.5 8.3 7.9 7.8 -3.3 15.6 56.9 58.4 -8.5 21.1 -23.0 -18.3 -7.0 27.5 2.0 -0.5 -1.9 -1.2 -1.2 1.07 -2.3 0.92 0.3 0.90 0.6 0.94 2.6 1.13 0.6 1.24 4.1 3.1 2.2 2.8 2.3 2.9 4.4 3.6 3.3 2.4 Sources: INE, ECB, Euronext Lisboa, Reuters and Banco de Portugal. Notes: (a) Up to December 1998, 3-month Lisbor. (b) A positive change corresponds to an appreciation of the index. Up to 1999, the index includes a group of 13 trading partners; from 1999 onwards, the index includes a group of 22 trading partners. For details on the methodology see A. C. Gouveia and C. Coimbra (2004), “New effective exchange rate index for the Portuguese economy”, Quarterly Bulletin of Banco de Portugal, December. Banco de Portugal | Annual Report | 2004 133 Supplementary tables Table A.2.3 COMPETITIVENESS AND STRUCTURAL INDICATORS Annual rate of change, in percentage 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Portugal Nominal effective exchange rate index(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real effective exchange rate index (based on relative CPIs)(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation per employee(b)(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Productivity per employee(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nominal unit labour costs(b)(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 3.4 - -0.5 0.3 5.6 1.9 3.6 -1.9 -1.6 5.9 2.4 3.4 -1.2 0.1 5.3 1.8 3.3 -1.2 -0.1 5.3 1.9 3.4 -2.3 -1.9 6.6 1.6 4.9 0.3 2.2 5.6 0.0 5.6 0.6 2.0 3.9 0.0 3.9 2.6 3.7 2.6 -0.8 3.3 0.6 1.0 2.6 1.0 1.6 Euro area Compensation per employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Productivity per employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nominal unit labour costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 1.6 1.6 2.4 0.9 1.5 2.0 1.6 0.4 1.1 0.8 0.3 2.0 0.9 1.0 2.7 1.5 1.2 2.9 0.3 2.5 2.5 0.3 2.2 2.4 0.4 2.0 2.2 1.3 0.9 European Union (EU25) Compensation per employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Productivity per employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nominal unit labour costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - - - 4.1 2.1 2.0 4.0 0.8 3.1 3.2 0.8 2.3 3.0 0.8 2.2 2.8 1.8 0.9 Portugal GDP per capita in PPS as a percentage of the EU15 average. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Labour force as a percentage of total population(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employment as a percentage of the labour force(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Labour productivity (1000 PPS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Labour productivity as a percentage of the EU15 average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percentage of the population aged 20-24 years that completed at least secondary education(e) . Gross domestic expenditure on R&D as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percentage of gross domestic expenditure on R&D financed by government . . . . . . . . . . . . . . . . 65.9 48.1 92.9 24.9 61.3 45.1 0.6 65.3 66.0 48.7 92.9 25.8 60.9 46.2 - 67.1 49.1 93.4 27.2 61.4 47.1 0.6 68.2 68.4 49.4 94.9 28.4 62.2 39.3 69.1 70.1 49.8 95.5 30.1 63.7 40.1 0.8 69.7 70.2 50.2 95.9 31.7 64.1 42.8 64.8 70.3 50.7 95.9 32.4 64.0 43.5 0.9 61.0 70.1 51.1 94.9 33.5 64.1 44.2 0.8 - 68.4 51.3 93.6 33.3 63.0 47.7 0.8 - 67.4 51.2 93.2 34.3 62.6 49.0 - European Union (EU15) Percentage of the population aged 20-24 years that completed at least secondary education. . . Gross domestic expenditure on R&D as a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percentage of gross domestic expenditure on R&D financed by government . . . . . . . . . . . . . . . . 69.2 1.9 39.1 68.1 1.9 38.4 69.5 1.9 37.1 1.9 36.1 72.4 1.9 34.9 73.6 1.9 34.3 73.4 2.0 34.1 73.9 2.0 - 73.8 2.0 - 73.5 - Price/cost competitiveness Structural indicators Sources: ECB, European Commission, OECD, INE and Banco de Portugal. Notes: (a) A positive change corresponds to an appreciation of the index. Up to 1999, the index includes a group of 13 trading partners; from 1999 onwards, the index includes a group of 22 trading partners. For details on the methodology see A. C. Gouveia and C. Coimbra (2004), “New effective exchange rate index for the Portuguese economy”, Quarterly Bulletin of Banco de Portugal, December 2004. (b) Average compensation per employee, gross of contributions and income taxes, excluding government transfers to Caixa Geral de Aposentações. In 2003, figures adjusted for the effect of the selling of non-performing tax and social contributions by general government. For more details see Box 6.1 ‘Budgetary effects of the temporary measures implemented in 2002-2004’. (c) Sources: 1995-2003 - INE National Accounts; 2004 - INE Employment Survey. (d) Source: European Commission. (e) Series break in 1998. Banco de Portugal | Annual Report | 2004 134 Supplementary tables Table A.3.1 GROSS VALUE ADDED BY SECTOR OF ACTIVITY(a) Real growth rates, per cent Weights in 2003 1996 1997 1998 1999 2000 2001 2002 2003 2004 Agriculture, forestry and fisheries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 6.1 -8.1 -3.3 7.0 -3.9 -0.5 5.7 -3.0 2.0 Industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Manufacture of food products, beverages and tobacco . . . . . . Textiles, wearing apparel, leather and footwear . . . . . . . . . . . . Wood, cork and paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of chemicals and refined petroleum. . . . . . . . . . . Metal products, machinery and transport equipment . . . . . . . 17.3 7.8 6.1 2.2 0.6 2.2 1.2 -0.6 -1.0 0.0 3.4 3.6 2.3 1.4 4.0 3.0 1.4 1.2 0.6 26.9 2.2 1.4 6.5 8.7 10.3 3.3 -0.2 1.9 1.0 4.5 2.1 -3.3 -2.1 4.6 3.1 4.3 -0.5 3.5 -0.6 2.3 1.5 1.8 1.0 0.4 0.0 0.4 -6.6 3.4 10.3 -0.3 0.4 -5.3 -2.2 1.3 1.9 2.6 -5.9 1.2 2.4 0.1 Electricity, gas and water supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 3.7 1.1 6.9 4.5 5.9 3.8 -2.9 10.7 5.2 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.0 3.3 8.0 5.4 2.9 4.9 2.6 -3.7 -13.2 -1.2 Services(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade and repair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hotels and restaurants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transport and communication . . . . . . . . . . . . . . . . . . . . . . . . . . Financial intermediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-market services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69.0 14.8 3.1 7.0 6.5 20.5 17.0 1.7 3.5 -5.4 0.9 -2.0 2.6 2.1 3.6 5.5 5.4 2.7 18.3 1.2 -1.2 4.4 3.8 6.0 9.2 20.5 4.0 -4.2 3.6 3.0 1.8 4.6 16.4 4.0 -2.2 3.7 2.6 5.2 6.8 10.7 3.4 0.4 2.3 2.3 2.0 6.6 9.2 2.1 -2.2 1.3 0.8 -1.5 2.1 -1.5 2.0 2.2 0.5 -1.7 -2.3 0.8 6.0 1.8 -0.6 1.6 1.9 1.7 7.3 5.7 -0.3 -0.4 GDP(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 3.5 4.0 4.6 3.8 3.4 1.7 0.4 -1.1 1.1 Sources: INE and Banco de Portugal. Notes: (a) Banco de Portugal estimates derived from the INE’s National Accounts from 1995 to 2003 (ESA95). (b) Net of financial intermediation services indirectly measured and considered as intermediate consumption. (c) GDP at market prices. Nominal GDP includes not only sectoral GVA but also VAT and import taxes. Banco de Portugal | Annual Report | 2004 135 Supplementary tables Table A.3.2 GROSS DOMESTIC PRODUCT - EXPENDITURE SIDE(a) Current prices, EUR millions Weights in 2003 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Private consumption. . . . . . . . . . . . . . . . . . . Public consumption . . . . . . . . . . . . . . . . . . . Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross fixed capital formation . . . . . . . . . Machinery and metal products . . . . . Transport equipment . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in inventories . . . . . . . . . . . . . . . Domestic demand . . . . . . . . . . . . . . . . . . . . . 62.0 21.2 23.2 22.6 5.1 1.8 11.9 3.8 0.6 106.5 51227 15032 19861 18457 4594 1552 9921 2391 1404 86121 54706 16331 21280 20123 5008 1841 10644 2630 1157 92317 58135 17704 24593 23771 5745 2434 12604 2988 822 100432 62774 19124 28331 27125 6792 2941 13792 3600 1205 110229 67373 21254 30575 29462 7320 3319 14579 4245 1113 119202 71556 23697 33264 32420 8128 3695 16063 4533 844 128517 75230 25596 34218 33258 8091 3206 17160 4801 960 135044 78556 27198 32934 32167 7102 2691 17225 5150 766 138688 80986 27736 30292 29491 6648 2378 15526 4939 800 139013 85058 28885 31828 30718 7136 2301 16103 5179 1110 145772 Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . Services. . . . . . . . . . . . . . . . . . . . . . . . . . Overall demand. . . . . . . . . . . . . . . . . . . . . . . Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . Services. . . . . . . . . . . . . . . . . . . . . . . . . . 30.7 22.0 8.7 137.2 37.2 32.6 4.6 24607 18212 6396 110728 29901 26008 3894 25908 19517 6391 118225 31995 27911 4084 28596 21548 7048 129027 36013 31627 4386 31285 23014 8271 141514 40552 35588 4963 33007 23817 9190 152209 44180 38557 5623 37642 27279 10363 166159 50611 44422 6189 38578 27547 11031 173622 51072 44956 6116 39507 28081 11427 178196 49738 43588 6150 40134 28715 11419 179147 48572 42580 5992 42517 30005 12513 188289 53102 46813 6290 GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 80827 86230 93014 100962 108030 115548 122550 128458 130576 135187 Sources: INE and Banco de Portugal. Note: (a) Banco de Portugal estimates derived from the INE’s National Accounts from 1995 to 2003 (ESA95). Banco de Portugal | Annual Report | 2004 136 Supplementary tables Table A.3.3 GROSS DOMESTIC PRODUCT - EXPENDITURE SIDE(a) Real growth rates, per cent Private consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross fixed capital formation. . . . . . . . . . . . . . . . . . . Machinery and metal products . . . . . . . . . . . . . . Transport equipment . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in inventories(b) . . . . . . . . . . . . . . . . . . . . . . . Domestic demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contribution of domestic demand to GDP(b) . . . . . Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overall demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Imports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contribution of foreign demand to GDP(b) . . . . . . . GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1996 1997 1998 1999 2000 2001 2002 2003 2004 2.9 3.4 3.0 5.7 3.7 19.3 4.3 6.4 -0.6 3.0 3.2 7.8 11.0 -1.4 4.1 5.5 5.9 2.8 0.3 3.5 3.1 2.2 11.4 13.9 11.9 28.3 14.0 7.3 -0.4 4.9 5.2 8.1 8.0 8.7 5.6 10.0 10.7 4.7 -1.2 4.0 5.2 4.1 12.8 11.5 17.4 20.8 6.9 11.8 0.5 6.9 7.4 8.4 6.6 14.2 7.2 14.0 14.4 10.9 -2.8 4.6 5.1 5.6 5.9 6.4 9.7 8.3 3.7 9.0 -0.1 5.4 5.9 5.4 3.8 9.8 5.4 9.3 9.0 11.5 -2.1 3.8 2.7 3.8 2.4 3.8 4.5 5.2 4.0 0.6 -0.4 2.8 3.1 8.4 8.0 9.7 4.0 5.6 5.4 6.9 0.3 3.4 1.2 3.9 1.0 0.8 2.0 -14.8 3.1 2.9 0.1 1.6 1.8 0.6 0.4 1.3 1.4 0.7 1.4 -4.4 -0.1 1.7 1.0 1.7 -5.3 -5.1 -9.1 -15.0 -3.2 1.3 -0.1 -0.5 -0.5 2.4 2.3 2.7 0.2 -0.5 -0.6 0.6 0.9 0.4 -0.1 0.3 -10.6 -9.9 -4.6 -11.0 -11.8 -10.4 -0.2 -2.5 -2.7 4.5 7.1 -1.7 -0.9 -0.4 -0.2 -2.3 1.6 -1.1 2.5 0.9 2.2 1.3 6.5 -4.3 -0.3 2.0 0.2 2.1 2.2 5.2 3.9 8.3 2.8 7.4 7.7 4.8 -1.1 1.1 Sources: INE and Banco de Portugal. Notes: (a) Banco de Portugal estimates derived from the INE’s National Accounts from 1995 to 2003 (ESA95). (b) Contribution to the GDP growth rate in percentage points. Banco de Portugal | Annual Report | 2004 137 Supplementary tables Table A.3.4 GROSS DOMESTIC PRODUCT - EXPENDITURE SIDE(a) Change in implicit deflators, per cent 1996 1997 1998 1999 2000 2001 2002 2003 2004 Private consumption . . . . . . . . . . . . . . . . . . . Public consumption . . . . . . . . . . . . . . . . . . . . Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross fixed capital formation . . . . . . . . . Machinery and metal products . . . . Transport equipment . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in inventories . . . . . . . . . . . . . . . Domestic demand . . . . . . . . . . . . . . . . . . . . . . 3.7 5.0 4.1 3.2 5.1 -0.6 2.9 3.4 4.0 3.0 6.1 3.8 3.7 2.5 3.0 3.9 5.9 3.7 2.7 3.8 2.1 2.4 0.7 0.0 2.4 7.8 2.7 2.2 5.3 1.9 2.1 -1.7 4.2 1.9 8.2 2.6 3.4 7.4 6.3 6.0 6.3 5.8 5.9 6.2 4.9 3.9 4.0 1.8 1.8 -2.4 1.9 3.6 2.9 3.4 3.4 4.4 1.6 1.9 -3.5 -1.3 3.7 5.9 3.2 3.2 1.6 2.9 1.8 -1.9 -0.7 2.2 7.0 2.8 2.5 3.2 2.8 2.8 0.8 1.1 4.0 2.8 2.7 Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goods. . . . . . . . . . . . . . . . . . . . . . . . . . Services . . . . . . . . . . . . . . . . . . . . . . . . Overall demand. . . . . . . . . . . . . . . . . . . . . . . . Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goods. . . . . . . . . . . . . . . . . . . . . . . . . . Services . . . . . . . . . . . . . . . . . . . . . . . . -2.3 -3.4 1.3 2.6 1.4 1.3 2.0 2.1 2.3 1.5 3.4 2.4 2.3 2.6 0.9 0.2 2.8 2.3 -1.2 -1.7 2.0 0.1 -0.3 1.1 2.1 -0.3 -0.6 1.6 5.2 6.1 2.8 4.9 8.5 9.3 2.9 1.8 0.6 5.1 3.0 0.2 -0.2 3.3 0.0 -0.3 0.9 2.5 -2.2 -2.5 0.0 -2.8 -4.5 1.7 1.5 -1.9 -2.1 -0.3 0.7 0.5 1.2 2.2 1.8 2.1 0.1 GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 3.8 3.8 3.1 3.5 4.3 4.4 2.8 2.4 Sources: INE and Banco de Portugal. Note: (a) Banco de Portugal estimates derived from the INE’s National Accounts from 1995 to 2003 (ESA95). Banco de Portugal | Annual Report | 2004 138 Supplementary tables Table A.3.5 FOREIGN DEMAND OF GOODS, PORTUGUESE EXPORTS AND MARKET SHARE Real growth rates, per cent Weights in 2003 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Foreign demand for the Portuguese economy(a) . . . . 100.0 8.6 4.6 10.0 10.6 7.9 11.1 1.0 1.5 3.8 8.2 Intra-euro area foreign demand . . . . . . . . . . . . . . . of which imports from: Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76.2 9.3 3.4 9.6 11.1 8.2 11.5 1.2 1.2 3.5 8.1 23.9 20.1 15.4 5.2 5.0 4.4 13.1 5.7 9.1 10.3 8.1 12.2 7.7 2.8 0.1 -1.8 2.8 4.5 13.8 8.7 7.2 11.4 4.3 10.0 13.4 10.5 12.3 8.9 7.3 8.3 12.2 7.7 7.6 7.5 3.0 5.6 10.5 11.1 15.0 8.0 8.3 10.6 3.3 -0.2 1.0 0.0 -0.2 1.6 3.4 -1.5 3.2 -1.0 1.4 -0.2 5.2 5.8 -0.2 0.9 3.3 1.0 9.8 7.8 8.1 3.2 7.5 7.8 Extra-euro area foreign demand . . . . . . . . . . . . . . . of which imports from: United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . USA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.8 6.8 7.7 11.2 9.3 7.1 10.2 0.4 2.2 4.6 8.6 11.8 6.5 6.2 9.0 9.5 9.3 9.8 14.4 8.5 11.7 6.7 12.4 8.9 13.5 3.1 -3.2 1.7 3.7 5.5 4.7 7.5 10.8 12.8 3.9 11.0 6.1 8.0 -1.8 6.6 -3.7 3.8 -3.8 8.0 -2.9 0.4 -0.6 2.3 0.8 7.1 3.2 3.9 -4.0 Portuguese exports of goods(b) . . . . . . . . . . . . . . . . . . Market share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sources: European Commission, UK Office for National Statistics, INE and Banco de Portugal. Notes: (a) Computed as a weighted average of the real growth rates of imports of goods in 17 major trading partners. Each individual country was weighted according to its share in Portuguese exports in the previous year. The 17 countries selected account for about 90 percent of total exports. (b) Excludes the value of exports of aeronautic material after repair. Banco de Portugal | Annual Report | 2004 139 Supplementary tables Table A.3.6 PORTUGUESE EXPORTS OF GOODS BY MAIN ECONOMIC CATEGORIES(a) Nominal growth rates, per cent Weights in 2003 1998 1999 2000 2001 2002 2003 2004(p) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 6.3 3.5 14.6 2.0 1.8 2.5 4.9 Consumer goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-food(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Light passenger vehicles. . . . . . . . . . . . . . . . . . . . . . 40.9 6.6 27.0 7.3 3.9 4.9 3.9 3.1 2.0 0.6 2.3 1.6 6.2 12.3 6.4 1.8 4.2 1.8 2.5 11.6 -9.1 10.1 -11.1 -14.4 -1.8 3.8 -0.3 -11.1 1.3 5.3 1.0 -1.1 Equipment goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transport material(b) . . . . . . . . . . . . . . . . . . . . . . . . Other equipment goods . . . . . . . . . . . . . . . . . . . . . . 28.2 14.2 14.1 21.5 23.5 20.3 5.2 -0.5 9.0 20.3 28.3 15.6 8.6 0.8 13.8 33.2 82.6 4.1 9.7 8.3 11.0 0.8 -0.8 2.5 Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 -27.9 20.3 55.7 -24.3 4.8 31.3 23.6 Intermediate goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.4 5.1 4.4 22.6 -3.4 -2.0 0.5 12.8 Sources: INE (International Trade Statistics) and Banco de Portugal. Notes: (a) The classification presented in this table is different from that of INE as light passenger vehicles are considered as consumer goods and not as equipment goods. (b) Excluding light passenger vehicles. (p) Preliminary data. Banco de Portugal | Annual Report | 2004 140 Supplementary tables Table A.3.7 PORTUGUESE EXPORTS OF GOODS BY MAIN ECONOMIC CATEGORIES(a) Real growth rates, per cent Weights in 2003 1998 1999 2000 2001 2002 2003 2004(p) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 6.1 3.8 8.0 1.5 2.2 7.3 4.3 Consumer goods . . . . . . . . . . . . . . . . . . . . Food . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-food(b) . . . . . . . . . . . . . . . . . . . . . Light passenger vehicles . . . . . . . . . . 40.9 6.6 27.0 7.3 3.0 3.1 3.4 2.1 2.8 0.3 2.5 4.0 2.5 7.7 4.1 -3.7 2.3 -0.9 1.3 9.0 -8.1 9.9 -11.1 -11.4 3.6 9.8 6.7 -8.5 3.1 5.0 2.9 1.5 Equipment goods. . . . . . . . . . . . . . . . . . . . Transport material(b) . . . . . . . . . . . . . Other equipment goods . . . . . . . . . . . 28.2 14.2 14.1 19.6 22.8 18.3 7.5 0.0 11.4 19.1 21.8 14.7 6.2 0.2 10.9 26.7 82.8 -1.4 14.9 12.4 16.4 1.6 -1.6 3.5 Fuel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 -10.4 3.5 1.5 -17.2 9.8 27.7 10.2 Intermediate goods . . . . . . . . . . . . . . . . . . 28.4 5.2 3.9 12.0 -2.2 -0.9 4.7 9.4 Sources: INE (International Trade Statistics) and Banco de Portugal. Notes: (a) The classification presented in this table is different from that of INE because light passenger vehicles are considered as consumer goods and not as equipment goods. (b) Excluding light passenger vehicles. (p) Preliminary data. Banco de Portugal | Annual Report | 2004 141 Supplementary tables Table A.3.8 PORTUGUESE IMPORTS OF GOODS BY MAIN ECONOMIC CATEGORIES(a) Nominal growth rates, per cent Weights in 2003 1998 1999 2000 2001 2002 2003 2004(p) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 12.6 8.7 15.3 1.9 -3.7 -1.8 10.5 Consumer goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-food(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Light passenger vehicles . . . . . . . . . . . . . . . . . . . . . . 31.1 8.9 16.5 5.7 22.4 19.8 16.7 39.8 14.7 11.5 11.8 24.2 5.6 4.6 9.3 -0.1 3.2 11.0 4.7 -8.1 0.6 -0.5 3.5 -4.3 -2.6 1.4 0.0 -14.2 10.0 5.5 10.0 16.9 Equipment goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transport material(b) . . . . . . . . . . . . . . . . . . . . . . . . . Other equipment goods . . . . . . . . . . . . . . . . . . . . . . 28.1 9.7 18.4 18.1 11.1 22.3 7.9 10.6 6.5 12.3 12.4 12.2 1.8 -1.7 3.7 -7.9 -11.3 -6.2 -0.6 3.1 -2.5 8.9 9.4 8.7 Fuel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.9 -23.3 39.5 74.5 -3.8 -5.0 3.4 23.0 Intermediate goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.8 8.0 -0.5 15.6 2.7 -3.5 -3.6 8.6 Sources: INE (International Trade Statistics) and Banco de Portugal. Notes: (a) The classification presented in this table is different from that of INE because light passenger vehicles are considered as consumer goods and not as equipment goods. (b) Excluding light passenger vehicles. (p) Preliminary data. Banco de Portugal | Annual Report | 2004 142 Supplementary tables Table A.3.9 PORTUGUESE IMPORTS OF GOODS BY MAIN ECONOMIC CATEGORIES(a) Real growth rates, per cent Weights in 2003 1998 1999 2000 2001 2002 2003 2004(p) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 14.5 9.4 5.4 2.2 -1.2 0.4 8.3 Consumer goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-food(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Light passenger vehicles. . . . . . . . . . . . . . . . . . . . . 31.1 8.9 16.5 5.7 19.7 15.6 14.3 39.4 14.1 10.9 12.6 20.0 1.5 -0.3 4.0 -0.2 -0.3 7.5 2.1 -13.6 2.5 1.6 5.8 -6.8 0.3 5.4 3.4 -15.0 11.9 4.4 14.4 16.5 Equipment goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transport material(b) . . . . . . . . . . . . . . . . . . . . . . . . Other equipment goods . . . . . . . . . . . . . . . . . . . . . 28.1 9.7 18.4 17.5 9.6 22.0 8.0 10.0 6.8 7.3 8.0 6.9 2.4 -4.5 6.3 -6.5 -11.7 -4.0 2.7 2.6 2.5 9.3 9.3 9.3 Fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.9 6.3 10.0 -1.0 3.4 2.3 -1.9 6.9 Intermediate goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.8 8.8 3.8 9.5 3.6 -1.0 -1.1 6.1 Sources: INE (International Trade Statistics) and Banco de Portugal. Notes: (a) The classification presented in this table is different from that of INE because light passenger vehicles are considered as consumer goods and not as equipment goods. (b) Excluding light passenger vehicles. (p) Preliminary data. Banco de Portugal | Annual Report | 2004 143 Supplementary tables Table A.3.10 EXPORTS OF GOODS BY ECONOMIC ZONES AND COUNTRIES OF DESTINATION Structure of exports - weights, per cent 2003 Nominal growth rate, per cent 2004(p) 1996 1997 1998 1999 2000 2001 2002 2003 2004(p) 1996 - 2000 2001-2004 Intra-EU25 . . . . . . . . . . . . . 82.3 80.6 80.8 79.4 8.3 11.0 8.0 5.1 10.9 1.6 1.9 2.0 4.2 Intra-EU15 . . . . . . . . . . . . . France. . . . . . . . . . . . . . . . . Netherlands. . . . . . . . . . . . Germany . . . . . . . . . . . . . . Italy. . . . . . . . . . . . . . . . . . . United Kingdom. . . . . . . . Ireland . . . . . . . . . . . . . . . . Denmark . . . . . . . . . . . . . . Greece. . . . . . . . . . . . . . . . . Spain. . . . . . . . . . . . . . . . . . Sweden. . . . . . . . . . . . . . . . Finland . . . . . . . . . . . . . . . . Austria . . . . . . . . . . . . . . . . Belgium/Luxembourg . . 81.4 13.9 4.7 19.8 4.0 11.6 0.5 1.6 0.4 16.5 1.9 0.7 1.0 4.8 79.4 13.3 3.9 16.2 4.5 10.1 0.5 0.9 0.4 22.3 1.4 0.5 0.6 4.6 79.4 13.2 3.8 14.8 4.8 10.3 0.5 0.9 0.4 23.8 1.3 0.5 0.6 4.5 78.6 14.0 4.0 13.5 4.3 9.6 0.6 0.8 0.4 24.9 1.1 0.7 0.6 4.1 8.1 10.1 0.9 6.1 19.0 5.5 27.7 -9.7 31.0 4.1 4.0 -1.8 28.5 46.3 10.8 8.8 11.8 4.0 15.7 24.2 3.7 9.7 -7.4 10.4 12.7 8.3 5.2 18.5 7.9 6.6 2.5 9.0 10.3 5.2 12.8 -11.2 6.4 15.7 -3.5 -10.0 -9.7 14.2 5.0 1.8 -4.7 0.6 6.5 3.6 20.4 -1.1 30.1 17.8 -2.8 -5.9 9.1 5.3 10.5 4.1 10.0 4.7 9.0 3.4 9.1 -4.0 -12.2 22.2 4.9 -2.4 -7.6 42.5 1.5 2.4 -2.0 7.4 14.2 -4.2 -1.5 -9.3 -3.2 2.2 -6.9 -3.2 -15.2 -8.4 1.8 8.3 -3.8 -5.3 4.5 3.5 8.7 -5.7 -0.9 10.6 -0.1 -7.3 -7.8 -17.1 1.9 -0.1 0.4 -14.3 6.9 1.5 0.5 -9.2 21.4 16.2 -8.0 5.3 0.0 5.0 4.4 12.8 11.3 -6.1 -5.8 -3.9 15.6 -4.2 7.3 13.8 -9.9 56.8 -2.6 -7.8 Intra-euro area . . . . . . . . . Extra-euro area . . . . . . . . . 66.3 33.7 67.0 33.0 66.9 33.1 67.0 33.0 9.3 6.7 8.6 14.2 9.3 0.8 5.6 -0.8 12.2 19.5 2.8 0.5 1.8 2.0 2.3 2.8 6.2 2.4 Extra-EU25 . . . . . . . . . . . . 17.7 19.4 19.2 20.6 9.0 8.5 -1.1 -4.4 33.9 4.1 1.5 4.5 7.5 Extra-EU15 . . . . . . . . . . . . EFTA. . . . . . . . . . . . . . . . . . USA . . . . . . . . . . . . . . . . . . Canada . . . . . . . . . . . . . . . . Japan. . . . . . . . . . . . . . . . . . POLAC. . . . . . . . . . . . . . . . Brazil . . . . . . . . . . . . . . . . . OPEC . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . 18.6 2.2 4.9 0.5 0.6 2.5 0.8 0.5 6.5 20.6 1.8 5.8 0.6 0.3 3.0 0.6 0.8 7.7 20.6 1.9 5.7 0.6 0.3 3.1 0.5 0.7 7.8 21.4 1.3 6.1 0.6 0.3 3.2 0.5 0.8 8.6 9.6 -4.1 5.7 -5.8 3.9 13.0 33.5 -1.5 17.4 9.3 -9.3 17.3 49.0 -4.4 22.7 6.6 3.5 6.0 -0.3 -0.3 9.5 -15.5 -13.4 -0.7 -1.5 0.6 -4.2 -3.5 -6.1 6.4 -9.1 -12.5 -10.8 -32.1 -1.2 -2.1 34.7 45.6 33.8 42.0 19.4 26.9 44.4 37.7 34.3 4.3 -3.3 0.9 1.6 -8.9 13.5 14.1 34.4 3.8 1.8 -13.2 2.1 -5.0 -13.3 10.3 -27.0 -6.1 8.8 4.8 3.1 1.9 19.0 -0.2 7.6 -21.4 1.6 8.1 6.6 -29.3 9.0 6.6 -4.0 3.0 19.7 16.0 13.9 Total . . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 8.4 10.5 6.3 3.5 14.6 2.0 1.8 2.5 4.9 Source: INE. Note: (p) Preliminary data. Banco de Portugal | Annual Report | 2004 144 Supplementary tables Table A.3.11 IMPORTS OF GOODS BY ECONOMIC ZONES AND COUNTRIES OF DESTINATION Structure of imports - weights, per cent Nominal growth rate, per cent 1996 - 2000 2001-2004 2003 2004(p) Intra-EU25 . . . . . . . . . . . . 77.4 78.0 79.3 76.6 10.3 13.1 15.6 8.8 11.8 2.3 0.2 -2.3 8.7 Intra-EU15 . . . . . . . . . . . . France. . . . . . . . . . . . . . . . Netherlands . . . . . . . . . . Germany . . . . . . . . . . . . . Italy. . . . . . . . . . . . . . . . . . United Kingdom . . . . . . Ireland . . . . . . . . . . . . . . . Denmark . . . . . . . . . . . . . Greece . . . . . . . . . . . . . . . Spain. . . . . . . . . . . . . . . . . Sweden . . . . . . . . . . . . . . Finland. . . . . . . . . . . . . . . Austria . . . . . . . . . . . . . . . Belgium/Luxembourg . 76.8 11.0 4.7 14.8 7.9 6.7 0.6 0.7 0.2 24.4 1.3 0.6 0.6 3.3 76.5 9.9 4.7 14.4 6.5 4.9 0.7 0.6 0.2 28.9 1.2 0.6 0.8 3.2 77.6 9.8 4.7 14.6 6.4 4.9 0.7 0.6 0.2 30.0 1.2 0.6 0.8 3.2 75.4 9.3 4.6 14.3 6.1 4.6 0.8 0.6 0.2 29.3 1.3 0.5 0.7 3.1 10.5 2.2 6.8 7.9 8.9 9.9 5.4 7.5 20.5 15.7 4.4 -0.9 15.9 8.1 13.1 8.9 20.1 8.5 8.6 22.6 34.0 -9.3 -25.0 17.4 9.7 25.9 3.7 8.3 15.3 17.8 16.5 15.3 9.8 5.4 13.9 10.1 34.5 16.6 46.5 35.2 8.0 20.1 8.7 10.3 6.1 5.2 6.5 8.6 11.9 3.2 5.0 12.5 0.1 7.0 15.0 4.7 10.9 7.2 10.8 7.6 6.2 1.5 2.9 29.2 63.1 18.3 6.3 -11.0 24.3 12.9 1.9 -1.9 7.0 2.3 -2.2 -14.3 0.7 -14.8 18.1 7.7 -9.2 1.1 14.3 3.4 -0.2 -3.4 -8.7 4.6 -5.3 -0.6 8.1 7.1 -5.7 1.5 0.7 3.7 67.1 -2.5 -2.1 -5.9 0.9 -4.2 -6.4 -7.5 7.5 -15.5 -11.3 2.0 -0.8 -1.2 11.2 -5.1 8.6 4.6 11.9 7.3 5.5 5.0 19.8 25.4 -9.6 11.0 20.0 3.3 7.1 5.5 Intra-euro area . . . . . . . . Extra-euro area . . . . . . . . 68.1 31.9 69.8 30.2 71.0 29.0 68.9 31.1 10.7 2.6 12.5 14.4 15.9 5.9 9.0 8.2 11.8 23.4 3.7 -1.8 -0.2 -11.3 -1.6 -2.2 8.6 15.1 Extra-EU25 . . . . . . . . . . . 22.6 22.0 20.7 23.4 0.8 13.3 2.7 8.4 28.6 0.7 -16.4 0.4 16.8 Extra-EU15 . . . . . . . . . . . EFTA . . . . . . . . . . . . . . . . USA . . . . . . . . . . . . . . . . . Canada . . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . POLAC. . . . . . . . . . . . . . . Brazil . . . . . . . . . . . . . . . . OPEC . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . 23.2 2.4 3.0 0.3 2.5 0.2 1.3 3.8 9.7 23.5 2.4 2.5 0.3 1.7 0.2 1.6 4.4 10.5 22.4 2.3 1.9 0.4 1.6 0.1 1.6 4.2 10.2 24.6 2.0 2.4 0.2 1.5 0.1 1.9 5.0 11.5 0.5 -12.3 3.4 18.9 5.5 5.5 -5.6 -5.7 5.4 13.1 4.7 13.6 5.0 25.4 73.2 42.1 11.2 8.4 3.9 21.0 -2.1 22.4 28.7 -20.5 -9.5 -32.6 15.0 8.8 24.8 12.1 -23.1 7.2 1.9 -21.1 20.5 6.8 31.2 25.0 20.8 31.4 4.8 93.1 30.3 94.5 23.3 2.0 10.4 25.2 -14.3 -23.2 47.6 16.3 -8.8 1.6 -14.5 -31.8 -44.8 -18.4 -11.4 -34.0 17.9 -14.1 -2.1 -0.7 2.3 -10.6 127.1 -7.1 -56.8 0.5 8.1 -2.6 16.7 -7.3 34.8 -43.7 -2.6 -23.2 29.4 24.2 19.8 Total . . . . . . . . . . . . . . . . . 100.0 100.0 100.0 100.0 7.9 13.1 12.6 8.7 15.3 1.9 -3.7 -1.8 10.5 1996 1997 1998 1999 2000 2001 2002 2003 2004(p) Source: INE. Note: (p) Preliminary data. Banco de Portugal | Annual Report | 2004 145 Supplementary tables Table A.3.12 PORTUGUESE EXPORTS OF GOODS BY GROUPS OF PRODUCTS Nominal growth rate, per cent NACE - Statistical classification of economic activities Weights in 2003 1998 1999 2000 2001 2002 2003 2004(p) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 6.3 3.5 14.6 2.0 1.8 2.5 4.9 Agriculture, hunting, forestry, fishing, and manufacture of food products, beverages and tobacco . . . . Mining and quarrying. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of textiles, textile products, leather and leather products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Manufacture of textiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of wearing apparel; dressing and dyeing of fur . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of leather and leather products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of wood, wood products, pulp, paper and paper products, publishing and printing . . . . . Manufacture of coke, petroleum products, and nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of chemicals, chemical products, man-made fibres, rubber and plastic products . . . . . . . . Manufacture of other non-metallic mineral products, basic metals, and fabricated metal products . . . . Manufacture of machinery and equipment, n.e.c. and manufacture of electrical and optical equipment of which: Machinery and equipment, n.e.c. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Electrical and optical equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of transport material(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Manufacture of motor vehicles, trailers and semi-trailers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture; other manufacturing industries, n.e.c.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 0.5 21.6 2.7 -29.3 2.5 1.8 -4.6 -0.7 13.9 9.6 2.9 6.2 -5.4 4.6 9.6 -3.1 -3.2 2.5 -4.9 -8.5 5.4 55.6 -3.6 8.0 8.4 5.3 9.4 2.1 9.2 9.6 20.0 6.2 2.7 -2.8 4.5 -27.6 5.3 15.4 15.5 0.4 -3.0 1.5 2.9 10.9 9.3 4.9 9.8 5.5 1.2 1.5 25.1 62.2 32.5 18.3 18.2 8.6 -0.6 6.2 -4.7 -23.3 -3.2 1.0 0.1 -2.2 -1.4 -7.0 1.3 9.2 8.7 7.5 3.1 -14.2 -1.0 -10.2 2.2 25.0 11.1 5.6 3.4 -3.3 -3.3 -4.4 1.1 22.8 15.3 21.6 -0.6 5.6 14.4 16.0 14.7 15.8 9.9 14.8 8.0 0.4 15.7 19.1 10.6 4.5 -1.5 7.9 4.0 2.7 -2.9 5.1 2.8 5.2 6.5 -3.3 2.9 14.3 3.3 12.2 5.7 2.0 2.9 6.0 14.3 8.3 20.2 -0.6 7.5 2.5 24.9 -1.7 15.9 Sources: INE and Banco de Portugal. Notes: (a) This item includes the values of imports and exports of aeronautical material after repair. (p) Preliminary data. Banco de Portugal | Annual Report | 2004 146 Supplementary tables Table A.3.13 PORTUGUESE EXPORTS OF GOODS BY GROUPS OF PRODUCTS Real growth rate, per cent NACE - Statistical classification of economic activities Weights in 2003 1998 1999 2000 2001 2002 2003 2004(p) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 6.1 3.8 8.0 1.5 2.2 7.3 4.3 Agriculture, hunting, forestry, fishing, and manufacture of food products, beverages and tobacco . . . Mining and quarrying. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of textiles, textile products, leather and leather products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Manufacture of textiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of wearing apparel; dressing and dyeing of fur . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of leather and leather products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of wood, wood products, pulp, paper and paper products, publishing and printing . . . . . Manufacture of coke, petroleum products, and nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of chemicals, chemical products, man-made fibres, rubber and plastic products . . . . . . . . Manufacture of other non-metallic mineral products, basic metals, and fabricated metal products . . . . Manufacture of machinery and equipment, n.e.c. and manufacture of electrical and optical equipment of which: Machinery and equipment, n.e.c. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Electrical and optical equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of transport material(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Manufacture of motor vehicles, trailers and semi-trailers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture; other manufacturing industries, n.e.c.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 0.5 21.6 0.9 -12.6 1.3 1.2 -12.6 -1.4 10.2 -19.1 1.4 4.1 3.0 1.5 10.2 -3.3 -5.3 4.7 -5.3 -6.3 5.5 30.0 -2.8 8.0 8.4 5.3 9.4 2.1 9.2 9.6 20.0 5.0 1.9 -4.3 -0.4 -9.0 13.0 13.7 14.6 -0.8 -4.5 2.6 -0.2 -6.5 11.3 6.5 12.5 5.8 0.4 -3.4 4.1 2.3 18.3 13.9 18.2 7.3 -2.3 -1.6 0.4 -17.8 -1.3 0.4 -0.1 -2.2 -7.3 -7.1 4.3 15.9 9.3 9.4 1.9 -11.1 0.9 -9.2 9.8 19.9 11.9 7.9 14.6 -3.6 0.0 -6.1 4.8 6.5 6.9 14.5 1.5 5.6 14.4 16.0 15.9 14.2 8.8 14.7 11.7 2.7 13.7 19.9 5.2 4.9 -1.9 4.9 7.3 -0.1 0.2 6.5 17.7 6.5 3.8 0.6 5.1 14.3 3.3 11.1 4.5 4.5 -0.7 0.8 13.0 5.2 20.0 2.8 5.7 3.4 55.0 0.9 15.7 Sources: INE and Banco de Portugal. Notes: (a) This item includes the values of imports and exports of aeronautical material after repair. (p) Preliminary data. Banco de Portugal | Annual Report | 2004 147 Supplementary tables Table A.3.14 PORTUGUESE IMPORTS OF GOODS BY GROUPS OF PRODUCTS Nominal growth rate, per cent NACE - Statistical classification of economic activities Weights in 2003 1998 1999 2000 2001 2002 2003 2004(p) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 12.6 8.7 15.3 1.9 -3.7 -1.8 10.5 Agriculture, hunting, forestry, fishing, and manufacture of food products, beverages and tobacco . . . Mining and quarrying. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of textiles, textile products, leather and leather products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Manufacture of textiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of wearing apparel; dressing and dyeing of fur . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of leather and leather products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of wood, wood products, pulp, paper and paper products, publishing and printing . . . . . Manufacture of coke, petroleum products, and nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of chemicals, chemical products, man-made fibres, rubber and plastic products . . . . . . . . Manufacture of other non-metallic mineral products, basic metals, and fabricated metal products . . . . Manufacture of machinery and equipment, n.e.c. and manufacture of electrical and optical equipment of which: Machinery and equipment, n.e.c. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Electrical and optical equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of transport material(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Manufacture of motor vehicles, trailers and semi-trailers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture; other manufacturing industries, n.e.c.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.0 7.6 8.7 14.3 -24.0 10.9 1.8 38.1 -1.4 5.5 65.4 8.8 8.2 -2.1 4.6 -1.8 -8.7 -3.0 -1.2 7.0 -4.1 5.4 22.2 2.9 4.3 2.4 2.0 4.0 2.4 14.8 9.7 21.8 10.9 16.2 5.9 16.0 -14.9 8.5 13.5 20.4 -4.4 4.0 1.2 9.2 29.3 7.3 5.7 6.3 9.0 9.3 7.7 19.9 92.9 11.9 22.2 13.0 -1.0 8.2 15.3 0.9 -6.2 6.1 1.5 3.0 -7.2 8.3 -4.6 -0.6 1.8 6.0 -0.3 -7.8 -5.5 0.8 -6.7 -0.4 -12.9 0.1 -2.7 -2.0 -0.8 10.8 1.6 4.8 11.6 8.1 19.9 7.5 7.4 14.3 14.3 17.0 22.7 22.2 5.7 6.6 16.8 12.6 13.3 7.0 -2.7 6.7 -5.2 -10.6 -6.2 -11.0 -6.9 0.8 -4.6 9.8 6.2 13.9 12.5 2.2 20.5 13.4 14.9 16.0 5.7 5.1 -4.4 -2.5 -6.3 7.6 -9.7 -3.0 12.2 13.0 Sources: INE and Banco de Portugal. Notes: (a) This item includes the values of imports and exports of aeronautical material after repair. (p) Preliminary data. Banco de Portugal | Annual Report | 2004 148 Supplementary tables Table A.3.15 PORTUGUESE IMPORTS OF GOODS BY GROUPS OF PRODUCTS Real growth rate, per cent NACE - Statistical classification of economic activities Weights in 2003 1998 1999 2000 2001 2002 2003 2004(p) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 14.5 9.4 5.4 2.2 -1.2 0.4 8.3 Agriculture, hunting, forestry, fishing, and manufacture of food products, beverages and tobacco . . . Mining and quarrying. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of textiles, textile products, leather and leather products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Manufacture of textiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of wearing apparel; dressing and dyeing of fur . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of leather and leather products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of wood, wood products, pulp, paper and paper products, publishing and printing . . . . . Manufacture of coke, petroleum products, and nuclear fuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of chemicals, chemical products, man-made fibres, rubber and plastic products . . . . . . . . Manufacture of other non-metallic mineral products, basic metals, and fabricated metal products . . . . Manufacture of machinery and equipment, n.e.c. and manufacture of electrical and optical equipment of which: Machinery and equipment, n.e.c. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Electrical and optical equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacture of transport material(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Manufacture of motor vehicles, trailers and semi-trailers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture; other manufacturing industries, n.e.c.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.0 7.6 8.7 12.4 4.8 9.7 3.6 8.5 4.3 1.6 -4.1 6.6 5.3 5.5 2.9 0.3 -1.0 -1.3 1.1 2.5 1.4 2.8 3.8 6.7 4.3 2.4 2.0 4.0 2.4 14.8 9.7 21.8 10.8 11.8 5.3 11.9 14.0 9.6 14.2 19.9 1.0 11.3 6.4 9.0 17.4 8.8 12.9 7.0 6.1 10.4 4.0 11.7 11.0 3.9 11.2 8.4 -1.5 8.6 8.5 0.9 0.1 6.7 1.0 4.1 -3.5 9.6 -6.8 4.0 8.6 8.3 3.1 -6.9 -1.1 7.9 -0.4 -0.6 -17.3 1.4 -2.3 6.2 0.5 18.7 6.2 6.0 5.1 7.1 10.2 10.7 7.4 14.3 14.3 18.0 21.3 21.3 5.9 7.7 16.3 10.7 6.9 8.3 -3.7 9.2 -6.4 -11.1 -4.4 -9.9 -4.8 12.4 -6.8 10.8 10.6 12.6 12.5 2.2 19.7 16.1 14.2 14.4 7.8 -1.0 -5.6 -1.2 -5.5 13.3 -12.4 3.9 10.4 12.5 Sources: INE and Banco de Portugal. Notes: (a) This item includes the values of imports and exports of aeronautical material after repair. (p) Preliminary data. Banco de Portugal | Annual Report | 2004 149 Supplementary tables Table A.3.16 HOUSEHOLD DISPOSABLE INCOME(a) EUR millions 1995 1996 1997 1998 1999 2000 2001 2002 2003(b) 2004 Compensation per employee(c) . . . . . . . . . . . . . . . . . . . . . . Corporate and property income. . . . . . . . . . . . . . . . . . . . . . Current transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . External transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Domestic transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct taxation (-) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social security contributions (-) . . . . . . . . . . . . . . . . . . . . . . Adjustment for the change in net equity of households in pension fund reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . 38620 21453 15339 12795 2543 4934 11663 41404 22022 16298 13573 2724 5480 12396 44610 22784 17452 14462 2990 5626 13611 48335 22440 18872 15767 3105 5902 14635 52120 23004 20276 17067 3209 6320 15456 57089 24757 22592 19024 3568 7082 17283 61148 25616 24435 20728 3707 7522 18534 64223 26659 25235 22399 2837 7639 19861 65603 26648 27271 24790 2481 7599 20304 68615 26721 29146 26652 2494 7951 21748 752 772 800 656 413 665 500 485 179 183.1 Disposable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nominal growth rate, per cent . . . . . . . . . . . . . . . . . 59566 - 62619 5.1 66408 6.1 69766 5.1 74037 6.1 80736 9.0 85643 6.1 89102 4.0 91797 3.0 94966 3.5 Memo: Private consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Saving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Saving rate (as a percentage of disposable income) . . . . . 51227 8339 14.0 54706 7913 12.6 58135 8273 12.5 62774 6992 10.0 67373 6663 9.0 71556 9180 11.4 75230 10413 12.2 78557 10545 11.8 80986 10811 11.8 85058 9908 10.4 Sources: INE and Banco de Portugal. Notes: (a) Banco de Portugal estimates derived from the INE’s National Accounts from 1995 to 2003 (ESA95). (b) Figures adjusted for the effects of the sale of tax credits by the general government. For further details, see “Box 6.1 Budgetary effects of the temporary measures implemented in 2002-2004“ in Chapter 6 Public finances. (c) Remuneration received by resident households. Includes social security contributions by employers and government transfers to Caixa Geral de Aposentações. Banco de Portugal | Annual Report | 2004 150 Supplementary tables Table A.3.17 EUR millions LENDING/BORROWING REQUIREMENTS BY INSTITUTIONAL SECTOR(a) 1996 1997 1998 1999 2000 2001 2002 2003(b) 2004(b) Households Saving. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital transfers(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net lending (+) / net borrowing (-) . . . . . . . . . . . . . . . . 7912.9 1491.3 6348.3 3055.9 8273.3 1414.2 7086.3 2601.2 6991.8 1901.9 8100.3 793.4 6663.3 2062.5 8822.2 -96.4 9180.3 1924.5 9462.1 1642.7 10412.6 3019.0 9510.0 3921.6 10545.1 3449.7 9620.5 4374.3 10810.9 2246.2 8214.6 4842.5 9907.5 2213.9 8262.8 3858.6 Non-financial corporations Saving. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital transfers(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net lending (+) / net borrowing (-) . . . . . . . . . . . . . . . . 9570.9 123.4 10403.5 -709.1 8898.3 805.6 12489.8 -2785.9 11061.0 1007.4 15261.0 -3192.6 11361.7 622.4 16287.9 -4303.8 9134.3 -333.9 18433.8 -9633.4 10434.5 -1001.0 19097.1 -9663.6 11099.8 -1424.2 17913.0 -8237.4 13100.5 244.4 16470.8 -3126.0 11930.1 327.7 17623.1 -5005.3 Financial sector Saving. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital transfers(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net lending (+) / net borrowing (-) . . . . . . . . . . . . . . . . 1130.1 -101.7 931.5 96.9 1706.6 -99.7 966.0 640.9 2050.0 -195.0 985.4 869.6 2016.0 -347.0 984.2 684.8 2206.0 -220.0 923.0 1063.0 1845.4 -1199.3 724.1 -78.0 2000.2 -1575.6 791.6 -367.0 2728.5 -579.9 1267.8 880.9 2590.0 -541.6 1823.0 225.4 General Government Saving. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital transfers(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net lending (+) / net borrowing (-) . . . . . . . . . . . . . . . . -729.6 210.9 3596.3 -4115.1 400.4 325.8 4050.8 -3324.6 1249.3 -466.1 3983.9 -3200.6 1404.3 -22.8 4480.7 -3099.2 780.5 316.9 4445.1 -3347.7 -882.7 363.0 4888.0 -5407.7 -456.6 1550.7 4608.7 -3514.7 -3347.8 757.8 4338.4 -6928.4 -2785.4 228.1 4479.6 -7036.9 External Saving. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital transfers(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net lending (+) / net borrowing (-) . . . . . . . . . . . . . . . . 3395.3 -1724.0 1671.3 5314.3 -2445.9 2868.4 6978.4 -2248.2 4730.2 9129.7 -2315.1 6814.6 11962.8 -1687.4 10275.3 12408.3 -1181.1 11227.2 9745.3 -2000.6 7744.7 6999.5 -2668.5 4331.0 10186.3 -2228.0 7958.2 Memo: Domestic saving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17884.3 21279.6 19278.6 24592.9 21352.3 28330.6 21445.3 30575.0 21301.1 33263.9 21809.8 34218.1 23188.5 32933.7 23292.1 30291.6 21642.2 31828.5 Sources: INE and Banco de Portugal. Notes: (a) Banco de Portugal estimates derived from the INE’s National Accounts from 1995 to 2003 (ESA95). (b) In 2003 and 2004, figures adjusted for the effects of the sale of tax credits by the general government and for the effects of the transfers of assets from public corporations to the general government. For further details, see “Box 6.1 Budgetary effects of the temporary measures implemented in 2002-2004”, in Chapter 6 Public finances. (c) Net amounts, i.e. the difference between incomes or transfers received from other sectors and those paid to other sectors, excluding transfers in kind. Banco de Portugal | Annual Report | 2004 151 Supplementary tables Table A.3.18 As a percentage of GDP LENDING/BORROWING REQUIREMENTS BY INSTITUTIONAL SECTOR(a) 1996 1997 1998 1999 2000 2001 2002 2003(b) 2004(b) Households Saving. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital transfers(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net lending (+) / net borrowing (-) . . . . . . . . . . . . . . . . 9.2 1.7 7.4 3.5 8.9 1.5 7.6 2.8 6.9 1.9 8.0 0.8 6.2 1.9 8.2 -0.1 7.9 1.7 8.2 1.4 8.5 2.5 7.8 3.2 8.2 2.7 7.5 3.4 8.3 1.7 6.3 3.7 7.3 1.6 6.1 2.9 Non-financial corporations Saving. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital transfers(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net lending (+) / net borrowing (-) . . . . . . . . . . . . . . . . 11.1 0.1 12.1 -0.8 9.6 0.9 13.4 -3.0 11.0 1.0 15.1 -3.2 10.5 0.6 15.1 -4.0 7.9 -0.3 16.0 -8.3 8.5 -0.8 15.6 -7.9 8.6 -1.1 13.9 -6.4 10.0 0.2 12.6 -2.4 8.8 0.2 12.8 -3.7 Financial sector Saving. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital transfers(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net lending (+) / net borrowing (-) . . . . . . . . . . . . . . . . 1.3 -0.1 1.1 0.1 1.8 -0.1 1.0 0.7 2.0 -0.2 1.0 0.9 1.9 -0.3 0.9 0.6 1.9 -0.2 0.8 0.9 1.5 -1.0 0.6 -0.1 1.6 -1.2 0.6 -0.3 2.1 -0.4 1.0 0.7 1.9 -0.4 1.3 0.2 General Government Saving. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital transfers(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net lending (+) / net borrowing (-) . . . . . . . . . . . . . . . . -0.8 0.2 4.2 -4.8 0.4 0.4 4.4 -3.6 1.2 -0.5 3.9 -3.2 1.3 0.0 4.1 -2.9 0.7 0.3 3.8 -2.9 -0.7 0.3 4.0 -4.4 -0.4 1.2 3.6 -2.7 -2.6 0.6 3.3 -5.3 -2.1 0.2 3.3 -5.2 External Saving. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital transfers(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net lending (+) / net borrowing (-) . . . . . . . . . . . . . . . . 3.9 -2.0 1.9 5.7 -2.6 3.1 6.9 -2.2 4.7 8.5 -2.1 6.3 10.4 -1.5 8.9 10.1 -1.0 9.2 7.6 -1.6 6.0 5.4 -2.0 3.3 7.5 -1.6 5.9 Memo: Domestic saving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.7 24.7 20.7 26.4 21.1 28.1 19.9 28.3 18.4 28.8 17.8 27.9 18.1 25.6 17.8 23.2 16.0 23.5 Sources: INE and Banco de Portugal. Notes: (a) Banco de Portugal estimates derived from the INE’s National Accounts from 1995 to 2003 (ESA95). (b) In 2003 and 2004, figures adjusted for the effects of the sale of tax credits by the general government and for the effects of the transfers of assets from public corporations to the general government. For further details, see “Box 6.1 Budgetary effects of the temporary measures implemented in 2002-2004”, in Chapter 6 Public finances. (c) Net amounts, i.e. the difference between incomes or transfers received from other sectors and those paid to other sectors, excluding transfers in kind. Banco de Portugal | Annual Report | 2004 152 Supplementary tables Table A.3.19 BALANCE OF PAYMENTS EUR millions 1996 1997 1998 1999 2000 2001 2002 2003 2004 Current account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Travel and tourism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royalties and licence fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Government services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation per employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Official transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . With the EU. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Migrants’ remittances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -3 395 -7 110 1 089 -240 1 923 -33 -196 -186 -180 -776 36 -812 -527 -7 -278 3 402 770 819 2 632 2 582 -5 314 -8 624 1 280 -299 2 245 -38 -228 -247 -155 -1 285 25 -1 310 -652 -418 -240 3 315 423 410 2 892 2 843 -6 979 -10 909 1 726 -264 2 819 -12 -234 -416 -167 -1 466 69 -1 535 -750 -572 -214 3 671 681 681 2 989 2 915 -9 130 -12 921 1 846 -422 2 833 -31 -260 -140 -135 -1 668 28 -1 696 -924 -186 -586 3 614 511 571 3 103 2 988 -11 963 -15 035 2 178 -531 3 298 -44 -267 -145 -132 -2 744 27 -2 771 -1 322 -463 -986 3 638 153 245 3 485 3 269 -12 408 -15 254 2 871 -560 3 762 -40 -251 20 -59 -3 760 -23 -3 738 -1 435 -295 -2 008 3 735 172 262 3 564 3 327 -9 745 -13 426 3 307 -297 3 811 -73 -303 188 -19 -2 576 -37 -2 539 -862 -122 -1 555 2 950 300 471 2 650 2 382 -7 000 -11 846 3 519 -110 3 682 -70 -239 264 -8 -1 546 -12 -1 534 118 -69 -1 583 2 873 578 765 2 296 1 967 -10 186 -14 598 4 136 -16 4 036 -78 -239 415 18 -2 499 -80 -2 419 -554 -122 -1 742 2 775 507 690 2 268 1 957 Capital Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Official transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . With the EU. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition/disposal of non-produced, non-financial assets. . . . . . . . 1 724 1 724 1 724 1 729 0 0 2 446 2 426 2 404 2 294 22 20 2 248 2 235 2 213 2 223 22 13 2 324 2 332 2 317 2 305 15 -9 1 670 1 652 1 649 1 672 3 18 1 198 1 215 1 208 1 259 7 -17 1 996 1 994 2 049 1 950 -55 2 2 652 2 639 2 722 2 743 -83 13 2 228 2 190 2 301 2 320 -111 38 Financial Account(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 034 3 837 4 754 8 277 10 865 11 267 6 990 4 690 9 440 ........................................... -1 363 -969 -23 -1 471 -572 -57 760 -342 -1 482 Memo: Current Account + Capital Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1 671 -2 868 -4 731 -6 806 -10 293 -11 210 -7 749 -4 348 -7 958 Errors and omissions(b) Sources: INE and Banco de Portugal. Notes: (a) For a breakdown of the Financial Account, see Table A.7.1. (b) A plus (minus) sign means a credit (debit) not registered in other item of the Balance of Payments. Banco de Portugal | Annual Report | 2004 153 Supplementary tables Table A.3.20 BALANCE OF PAYMENTS As a percentage of GDP 1996 1997 1998 1999 2000 2001 2002 2003 2004 Current account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Travel and tourism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royalties and licence fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Government services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation per employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Official transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . With the EU. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Migrants’ remittances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -3.9 -8.2 1.3 -0.3 2.2 0.0 -0.2 -0.2 -0.2 -0.9 0.0 -0.9 -0.6 0.0 -0.3 3.9 0.9 0.9 3.1 3.0 -5.7 -9.3 1.4 -0.3 2.4 0.0 -0.2 -0.3 -0.2 -1.4 0.0 -1.4 -0.7 -0.4 -0.3 3.6 0.5 0.4 3.1 3.1 -6.9 -10.8 1.7 -0.3 2.8 0.0 -0.2 -0.4 -0.2 -1.5 0.1 -1.5 -0.7 -0.6 -0.2 3.6 0.7 0.7 3.0 2.9 -8.5 -12.0 1.7 -0.4 2.6 0.0 -0.2 -0.1 -0.1 -1.5 0.0 -1.6 -0.9 -0.2 -0.5 3.3 0.5 0.5 2.9 2.8 -10.4 -13.0 1.9 -0.5 2.9 0.0 -0.2 -0.1 -0.1 -2.4 0.0 -2.4 -1.1 -0.4 -0.9 3.1 0.1 0.2 3.0 2.8 -10.1 -12.4 2.3 -0.5 3.1 0.0 -0.2 0.0 0.0 -3.1 0.0 -3.0 -1.2 -0.2 -1.6 3.0 0.1 0.2 2.9 2.7 -7.6 -10.5 2.6 -0.2 3.0 -0.1 -0.2 0.1 0.0 -2.0 0.0 -2.0 -0.7 -0.1 -1.2 2.3 0.2 0.4 2.1 1.9 -5.4 -9.1 2.7 -0.1 2.8 -0.1 -0.2 0.2 0.0 -1.2 0.0 -1.2 0.1 -0.1 -1.2 2.2 0.4 0.6 1.8 1.5 -7.5 -10.8 3.1 0.0 3.0 -0.1 -0.2 0.3 0.0 -1.8 -0.1 -1.8 -0.4 -0.1 -1.3 2.1 0.4 0.5 1.7 1.4 Capital Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Official transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . With the EU. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition/disposal of non-produced, non-financial assets. . . . . . . . 2.0 2.0 2.0 2.0 0.0 0.0 2.6 2.6 2.6 2.5 0.0 0.0 2.2 2.2 2.2 2.2 0.0 0.0 2.2 2.2 2.1 2.1 0.0 0.0 1.4 1.4 1.4 1.4 0.0 0.0 1.0 1.0 1.0 1.0 0.0 0.0 1.6 1.6 1.6 1.5 0.0 0.0 2.0 2.0 2.1 2.1 -0.1 0.0 1.6 1.6 1.7 1.7 -0.1 0.0 Financial Account(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 4.1 4.7 7.7 9.4 9.2 5.4 3.6 7.0 Errors and omissions(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1.6 0.0 0.0 -1.9 -1.0 0.0 0.0 -3.1 0.0 0.0 0.0 -4.7 -1.4 0.0 0.0 -6.3 -0.5 0.0 0.0 -8.9 0.0 0.0 0.0 -9.1 0.6 0.0 0.0 -6.0 -0.3 0.0 0.0 -3.3 -1.1 0.0 0.0 -5.9 Memo: Current Account + Capital Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sources: INE and Banco de Portugal. Notes: (a) For a breakdown of the Financial Account, see Table A.7.1. (b) A plus (minus) sign means a credit (debit) not registered in other item of the Balance of Payments. Banco de Portugal | Annual Report | 2004 154 Supplementary tables Table A.3.21 TRANSFERS WITH THE EUROPEAN UNION EUR millions 1996 1997 1998 1999 2000 2001 2002 2003 2004 Debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customs and levelling duties . . . . . . . . . . . . . . . . . . . . . . . . . . . Other debits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1076 906 132 38 1113 917 153 43 1188 986 176 26 1269 1063 202 4 1299 1095 199 5 1254 1066 182 5 1365 1220 143 3 1285 1158 123 4 1506 1341 162 3 Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reimbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EAGGF - Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EAGGF - Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ERDF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ESF. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social cohesion fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EAGGF - Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ERDF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3624 1895 206 631 62 227 644 127 1729 189 246 1284 9 3817 1523 7 645 62 256 378 175 2294 581 249 1449 15 4093 1869 2 639 71 225 727 204 2223 630 286 1275 32 4145 1840 71 653 77 265 610 163 2305 481 308 1502 14 3216 1544 21 653 63 222 509 76 1672 117 253 1260 43 2775 1515 9 875 8 139 444 41 1259 442 32 785 0 3764 1814 72 758 53 234 654 42 1950 395 212 1328 15 4913 2170 6 850 58 393 765 99 2743 266 233 2225 20 4404 2083 93 823 72 299 732 63 2320 317 290 1696 18 Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . 2548 3.0 2704 2.9 2905 2.9 2876 2.7 1917 1.7 1521 1.2 2399 1.9 3628 2.8 2898 2.2 Sources: INE and Banco de Portugal. Banco de Portugal | Annual Report | 2004 155 Supplementary tables Table A.4.1 EMPLOYMENT AND UNEMPLOYMENT 1998 1999 2000 2001 2002 2003 2004 2003 1Q 2Q 2004 3Q 4Q 1Q 2Q 3Q 4Q In thousands Total resident population . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10128.8 10167.3 10223.2 10294.2 10365.7 10445.1 10508.5 10417.9 10431.8 10454.5 10476.2 10484.8 10497.2 10515.8 10536.2 Labour force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5103.1 5142.7 5226.4 5325.2 5407.8 5460.3 5487.8 5450.3 5451.1 5465.7 5473.9 5454.4 5471.9 5501.4 5523.6 Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4850.9 4916.4 5020.9 5111.7 5137.3 5118.0 5122.8 5105.3 5117.7 5130.5 5118.3 5107.2 5124.6 5125.5 5133.9 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3457.3 3555.9 3649.6 3710.9 3747.9 3736.0 3782.3 3720.6 3726.9 3752.9 3743.7 3739.3 3798.8 3784.0 3807.0 Permanent contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2862.6 2890.8 2922.2 2957.1 2942.5 2967.5 3031.8 2943.3 2958.0 2981.7 2987.0 2979.6 3044.5 3033.7 3069.2 Fixed-term contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420.2 466.3 500.9 556.4 596.8 581.3 570.4 590.6 584.1 582.1 568.2 573.1 569.4 572.0 566.9 Other dependent labour . . . . . . . . . . . . . . . . . . . . . . . . . 173.5 198.8 226.6 197.5 208.6 187.3 180.1 186.7 184.8 189.2 188.6 186.7 184.8 178.2 170.8 By sector Agriculture and fishing. . . . . . . . . . . . . . . . . . . . . . . . . . 652.6 622.6 635.4 652.6 636.9 642.1 618.1 640.5 657.1 645.8 624.9 618.4 619.1 620.1 614.8 Industry, construction, energy and water . . . . . . . . . . 1704.8 1692.1 1733.6 1728.8 1727.7 1652.8 1596.0 1672.9 1677.3 1634.3 1626.7 1596.0 1601.2 1592.1 1594.7 Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1140.7 1107.4 1093.8 1095.8 1052.1 1018.8 1002.2 1026.8 1028.7 1009.3 1010.5 989.8 1003.6 1001.8 1013.5 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 515.7 537.4 593.8 578.8 618.4 583.6 548.1 594.0 597.9 575.1 567.3 557.4 552.8 547.9 534.1 Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2493.6 2600.9 2651.8 2730.3 2772.7 2823.0 2908.7 2791.7 2783.3 2850.2 2866.6 2892.8 2904.2 2913.4 2924.4 Unemployed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252.2 226.3 205.5 213.6 270.5 342.3 365.0 345.0 333.4 335.2 355.6 347.2 347.3 375.9 389.7 In percentage Participation rate Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aged 15-64. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Men aged 15-64. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Women aged 15-64. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unemployment rate Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Men. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Women. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Young people . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Breakdown of the stock of unemployed persons by reasons for job seeking First-job seekers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Collective dismissal and firm closure . . . . . . . . . . . . . . . . Individual dismissal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . End of a fixed-term contract . . . . . . . . . . . . . . . . . . . . . . . . End of contract by mutual agreement . . . . . . . . . . . . . . . . Other reasons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share of part-time workers . . . . . . . . . . . . . . . . . . . . . . . . . . . 50.4 70.4 78.9 62.2 50.6 70.6 78.7 62.7 51.1 71.2 78.9 63.8 51.7 72.0 79.4 64.8 52.2 72.6 79.8 65.6 52.3 72.8 79.4 66.5 52.2 72.9 79.0 67.0 52.3 72.9 79.3 66.6 52.3 72.8 79.2 66.6 52.3 72.8 79.6 66.2 52.3 72.9 79.4 66.4 52.0 72.6 78.9 66.4 52.1 72.8 79.0 66.7 52.3 73.1 79.1 67.2 52.4 73.3 79.1 67.7 5.0 3.9 6.2 10.4 4.4 3.9 5.0 8.8 3.9 3.1 4.9 8.6 4.0 3.2 5.0 9.4 5.0 4.1 6.0 11.6 6.3 5.5 7.2 14.5 6.7 5.8 7.6 15.3 6.3 5.5 7.3 14.0 6.1 5.2 7.2 13.4 6.1 5.5 6.9 14.7 6.5 5.6 7.5 15.8 6.4 5.5 7.4 15.5 6.3 5.6 7.2 14.0 6.8 6.0 7.8 16.0 7.1 6.3 7.9 15.8 17.8 16.6 9.6 27.6 13.6 14.7 11.0 14.9 15.5 11.0 28.9 15.0 14.8 11.0 13.3 16.8 11.7 28.4 16.2 13.8 10.9 16.0 13.9 14.0 27.9 8.5 19.7 11.1 15.2 12.7 16.0 27.7 8.8 19.6 11.2 13.5 13.0 19.6 26.1 9.9 17.9 11.7 13.4 16.8 20.0 24.1 10.9 14.8 11.3 12.2 12.9 18.0 27.6 9.0 20.3 12.0 11.8 12.7 21.8 26.1 8.6 19.0 11.8 14.0 13.3 19.2 25.4 10.2 17.9 11.5 16.0 13.2 19.4 25.3 11.6 14.5 11.4 13.4 14.3 19.2 25.5 11.8 15.8 11.4 11.4 17.4 20.4 24.1 11.1 15.6 11.2 15.0 17.1 19.1 24.0 10.3 14.5 11.2 13.7 18.1 21.1 23.2 10.4 13.6 11.5 2.7 -1.1 1.9 -0.6 1.7 -0.6 1.7 0.1 0.4 -0.8 -0.4 0.0 - -0.7 - -1.0 - -0.7 - -0.8 - -0.2 - 0.6 - -0.1 - -0.2 - Rates of change Average working hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total employment (National accounts) . . . . . . . . . . . . . . . Sources: INE (Labour force survey, unless otherwise indicated) and Banco de Portugal. Banco de Portugal | Annual Report | 2004 156 Supplementary tables Table A.4.2 LABOUR COSTS Average rate of change, per cent 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 - 5.6 1.8 5.9 2.8 5.3 2.5 5.3 3.1 6.6 3.0 5.6 1.6 3.9 0.4 2.6 -0.6 2.6 0.2 Compensation per employee Whole economy(a) Nominal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate sector Nominal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Collective bargaining Total excluding general government . . . . . . . . . . . . . Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6.1 2.3 5.5 2.4 5.0 2.3 4.5 2.3 5.9 2.4 5.6 1.6 3.9 0.4 1.7 -1.4 3.2 0.7 4.7 5.1 4.5 4.4 4.4 4.4 3.5 3.5 3.5 3.1 3.1 3.2 3.3 3.5 3.3 3.5 3.9 3.4 3.9 3.9 4.0 3.6 3.6 2.9 2.8 2.7 3.0 2.9 2.9 2.9 Memo: CPI (average annual rate of change.) . . . . . . . . . . . . . . . . 4.1 3.1 2.2 2.8 2.3 2.9 4.4 3.6 3.3 2.4 Sources: Ministério do Trabalho e da Solidariedade Social, INE (National accounts for the period 1996-2003 and Labour force survey for 2004) and Banco de Portugal. Note: (a) Average compensation per employee, gross of contributions and income taxes, not including the government transfer to Caixa Geral de Aposentações. In 2003, figures adjusted for the effect of the sale of tax credits. For more details, see “Box 6.1 Budgetary effects of the temporary measures implemented in 2002-2004” Banco de Portugal | Annual Report | 2004 157 Supplementary tables Table A.5.1 MAIN PRICE AND COST INDICATORS Rates of change, per cent 1996 1997 1998 1999 2000 2001 2002 2003 2004 Consumer Price Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 2.2 2.8 2.3 2.9 4.4 3.6 3.3 2.4 GDP deflator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 3.8 3.8 3.1 3.5 4.3 4.4 2.8 2.4 Industrial production price index Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacturing excluding energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 1.1 3.7 2.3 -4.7 0.5 3.6 -0.1 20.5 3.9 2.7 2.3 0.4 0.4 0.4 0.3 2.9 1.7 Import prices of goods(a) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-food. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Light passenger vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transport material, excluding light passenger vehicles . . . . . . . . . . . . Other equipment goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intermediate goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 1.7 1.8 1.9 1.0 0.9 0.2 1.2 18.5 -0.9 2.3 3.7 2.2 4.6 4.3 2.7 5.6 1.4 5.5 1.1 -1.7 2.3 3.6 2.1 0.3 0.6 1.4 0.2 -27.9 -0.7 -0.6 0.5 0.5 -0.8 3.6 -0.1 0.5 -0.4 26.8 -4.2 9.4 4.0 4.9 5.1 0.1 4.6 4.1 4.9 76.3 5.6 -0.3 3.4 3.2 2.6 6.4 -0.6 3.0 -2.4 -7.0 -0.9 -2.5 -1.9 -2.1 -2.2 2.6 -1.5 0.5 -2.3 -7.1 -2.6 -2.2 -2.9 -3.9 -3.2 0.9 -3.2 0.5 -4.9 5.4 -2.5 2.1 -1.7 1.1 -3.9 0.4 -0.3 0.1 -0.5 15.1 2.4 International commodity prices Oil prices (Brent), USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oil prices (Brent), EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-energy commodity prices, USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industrial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-energy commodity prices, EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industrial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.5 23.1 -9.1 1.9 -15.7 -6.4 5.0 -13.2 -4.3 7.1 2.2 7.3 -1.5 14.5 20.2 10.3 -30.8 -30.0 -16.0 -17.2 -15.0 -14.8 -16.0 -13.7 34.1 41.0 -10.8 -20.0 -3.7 -6.4 -16.2 1.2 58.6 83.0 4.2 -8.9 12.7 20.4 5.3 30.1 -12.5 -9.8 -10.7 -8.7 -11.7 -8.0 -5.8 -9.1 0.4 -4.9 4.5 15.4 -1.3 -0.9 9.1 -6.3 13.6 -5.0 14.3 10.3 16.8 -4.6 -7.7 -2.6 33.5 21.4 21.7 12.4 27.2 10.8 2.4 15.8 Memo: Nominal effective exchange rate index for Portugal(b) . . . . . . . . . . . . . . . . -0.5 -1.9 -1.2 -1.2 -2.3 0.3 0.6 2.6 0.6 Sources: Eurostat, Thomson Financial Datastream, HWWA, INE and Banco de Portugal. Notes: (a) Computed by Banco de Portugal on the basis of information made available by INE. The classification of main categories is somewhat different from that of INE as light passenger vehicles are considered as consumer goods and not as equipment goods. (b) A positive change corresponds to an appreciation of the index. The index includes a group of 13 trading partners until 1999; from 1999 onwards, the index includes a group of 22 trading partners. For a detailed description of the methodology, see Gouveia, A.C. and Coimbra, C. (2004), “New effective exchange rate index for the Portuguese economy” Economic Bulletin of Banco de Portugal, December. Banco de Portugal | Annual Report | 2004 158 Supplementary tables Table A.5.2 CPI - MAIN CATEGORIES AND AGGREGATES (a) Average rate of change, per cent Weights in 2004 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total excluding unprocessed food and energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1998 1999 2000 2001 2002 2003 2004 100.0 79.8 2.8 2.5 2.3 2.7 2.9 2.5 4.4 3.6 3.6 4.4 3.3 3.2 2.4 2.4 65.3 22.8 11.8 11.0 42.5 34.1 8.4 34.7 1.9 3.8 6.0 1.5 0.8 0.8 0.6 4.9 1.7 2.7 2.7 2.8 1.1 1.8 -1.9 3.7 2.2 1.9 2.5 1.4 2.4 1.4 6.1 4.2 4.2 6.1 8.8 3.1 3.1 2.5 5.2 4.8 2.4 1.9 0.3 3.8 2.7 3.1 1.2 6.0 2.7 2.9 2.6 3.1 2.6 2.0 4.9 4.5 1.6 1.4 0.0 2.9 1.7 0.8 5.4 3.8 19.8 3.0 7.3 10.0 7.9 5.5 19.1 3.2 4.9 1.6 11.1 6.4 3.5 4.9 -1.0 2.7 2.1 4.6 2.4 -3.9 -0.3 18.7 3.3 3.5 2.2 7.2 0.4 0.8 2.2 4.2 2.9 -3.7 0.7 4.8 2.9 3.8 2.1 0.8 0.8 3.7 2.0 3.1 4.8 -4.8 0.8 5.0 3.6 4.3 6.5 3.2 1.5 3.9 3.2 3.6 4.8 -2.2 2.2 5.2 4.2 5.5 1.5 4.8 2.5 2.9 3.1 4.8 5.0 0.8 2.2 5.8 5.7 5.8 2.6 4.6 1.3 4.0 2.6 1.9 4.3 -1.3 1.7 5.6 5.7 4.0 1.1 3.0 -1.1 3.0 1.6 1.7 3.5 -1.0 2.8 9.3 4.6 2.6 Aggregates Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unprocessed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Processed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Categories Food and non-alcoholic beverages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alcoholic beverages and tobacco. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clothing and footwear. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Housing, water, electricity, gas and other fuels . . . . . . . . . . . . . . . . . . . . . . . . . . Furnishings, household equipment and routine maintenance of the house . . Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recreation and culture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Education. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hotels, cafés and restaurants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous goods and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sources: INE and Banco de Portugal. Note: (a) Up to December 2002, the rates of change were calculated using 1997-based CPI. From January 2003 onwards, the rates of change are calculated using the 2002-based CPI. Banco de Portugal | Annual Report | 2004 159 Supplementary tables Table A.5.3 PORTUGAL AND EURO AREA - MAIN HICP AGGREGATES Average rate of change, per cent Weights in 2004 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 4.0 2.9 1.9 2.2 2.2 2.8 4.4 3.7 3.3 2.5 Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unprocessed . . . . . . . . . . . . . . . . . Processed . . . . . . . . . . . . . . . . . . . . Industrial. . . . . . . . . . . . . . . . . . . . . . . . . Non-energy . . . . . . . . . . . . . . . . . . Energy. . . . . . . . . . . . . . . . . . . . . . . Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61.7 21.6 11.0 10.6 40.1 32.2 7.9 38.3 3.0 3.3 2.4 4.3 2.8 3.2 0.8 6.5 2.2 2.3 0.6 4.2 2 2.3 0.9 5 1.1 0.4 1.5 -0.7 1.6 1.2 3.8 4 1.7 3.8 6.6 1.0 0.2 0.1 0.6 3.6 1.7 2.8 2.8 2.8 1.0 1.8 -1.8 3.3 2.2 2.0 2.5 1.4 2.4 1.5 6.1 4.0 4.2 6.1 8.9 3.1 3.1 2.5 5.2 4.7 2.4 1.9 0.2 3.8 2.7 3.1 1.2 5.9 2.4 2.6 2.1 3.1 2.4 1.8 4.9 4.6 1.6 1.4 0.0 2.8 1.8 0.8 5.4 3.9 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 2.4 2.2 1.6 1.1 1.1 2.1 2.3 2.3 2.1 2.1 Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unprocessed . . . . . . . . . . . . . . . . . Processed . . . . . . . . . . . . . . . . . . . . Industrial. . . . . . . . . . . . . . . . . . . . . . . . . Non-energy . . . . . . . . . . . . . . . . . . Energy. . . . . . . . . . . . . . . . . . . . . . . Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58.7 19.5 7.7 11.8 39.1 31.0 8.1 41.3 1.9 2.4 2.0 2.7 1.7 1.8 1.3 3.5 1.9 1.9 1.7 2.0 1.8 1.5 3.0 2.8 1.2 1.4 1.4 1.4 1.0 0.6 2.7 2.4 0.7 1.6 2.0 1.4 0.2 0.9 -2.6 1.9 0.9 0.6 0.0 0.9 1.0 0.7 2.4 1.5 2.5 1.4 1.8 1.2 3.0 0.5 13.0 1.5 2.3 4.5 7.0 2.9 1.2 0.9 2.2 2.5 1.7 3.1 3.1 3.1 1.0 1.5 -0.6 3.1 1.8 2.8 2.1 3.3 1.2 0.8 3.0 2.5 1.8 2.3 0.6 3.4 1.6 0.8 4.5 2.6 Portugal Euro area Source: Eurostat. Banco de Portugal | Annual Report | 2004 160 Supplementary tables Table A.6.1 GENERAL GOVERNMENT ACCOUNTS (NATIONAL ACCOUNTING) EUR millions 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on income and wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on households. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private sector system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Civil servants system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Imputed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on production and imports . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Value added tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax on oil products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Car tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of goods and services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers from the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other capital transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 981 30 476 27 035 7 161 4 934 2 226 8 851 8 137 5 833 2 304 714 11 023 35 392 33 611 29 660 8 184 5 480 2 703 9 407 8 762 6 160 2 603 645 12 070 38 335 36 161 32 149 8 925 5 626 3 299 10 424 9 766 6 925 2 840 659 12 799 41 350 39 761 35 256 9 426 5 902 3 524 11 352 10 597 7 480 3 116 755 14 478 45 807 43 886 38 884 10 606 6 320 4 286 12 266 11 468 8 129 3 339 797 16 012 48 849 47 192 42 310 12 008 7 082 4 925 13 608 12 561 8 861 3 701 1 047 16 695 51 392 49 213 44 222 12 116 7 522 4 594 14 665 13 544 9 684 3 861 1 120 17 441 55 563 53 224 47 535 12 559 7 639 4 920 15 749 14 586 10 260 4 326 1 163 19 227 58 260 54 598 49 097 12 056 7 753 4 303 16 736 15 321 10 615 4 706 1 415 20 305 61 366 56 212 50 216 12 477 7 863 4 614 17 491 16 042 10 709 5 333 1 449 20 249 5 507 2 193 676 1 514 1 928 1505 57 1 273 175 6 221 2 303 791 1 734 2 216 1781 60 1 612 110 6 651 2 292 835 1 917 2 095 2174 71 1 641 461 7 542 2 547 1 028 2 236 2 269 1589 84 1 424 80 8 347 2 567 1 237 2 650 2 352 1921 94 1 699 128 9 240 2 011 1 233 2 892 1 990 1657 103 1 496 58 9 595 2 456 1 193 2 873 2 118 2180 90 1 829 261 10 614 2 922 1 150 3 031 2 658 2338 105 1 948 286 11622 3 105 985 3 098 2 403 3662 103 1 858 1 701 11235 3 125 1 123 3 293 2 703 5154 19 1 543 3 592 Total expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intermediate consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on public debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . to households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . in kind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . to corporations (subsidies) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . other transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 399 32 132 10 990 3 003 5 052 13 087 10 672 9 515 1 157 1 086 1 329 4 266 3 018 1 249 39 497 34 331 11 829 3 384 4 627 14 491 11 545 10 217 1 328 1 284 1 662 5 166 3 596 1 570 41 666 35 767 12 842 3 628 3 941 15 357 12 352 10 862 1 490 1 152 1 853 5 899 4 051 1 848 44 543 38 504 14 096 3 836 3 490 17 081 13 486 11 855 1 632 1 480 2 114 6 039 3 984 2 055 48 880 42 456 15 602 4 510 3 464 18 879 14 694 12 840 1 854 1 819 2 366 6 424 4 481 1 943 52 115 46 330 17 326 5 095 3 680 20 229 16 226 14 278 1 948 1 238 2 766 5 785 4 445 1 340 56 729 50 024 18 500 5 322 3 882 22 320 17 721 15 507 2 214 1 585 3 015 6 705 4 888 1 817 59 028 53 632 19 770 5 512 3 894 24 455 19 336 16 944 2 392 1 881 3 238 5 396 4 609 788 62 064 56 122 19 555 4 814 3 779 27 973 22 390 18 637 3 753 2 081 3 502 5 943 4 338 1 604 65 319 58 965 20 312 5 108 3 831 29 713 24 171 20 156 4 015 2 213 3 329 6 354 4 480 1 875 Overall balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4 418 -4 106 -3 332 -3 193 -3 073 -3 266 -5 336 -3 466 -3 804 -3 953 Memo: Primary current expenditure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Primary balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 080 634 51 962 29 704 522 54 259 31 826 610 54 964 35 013 298 55 489 38 992 391 58 657 42 650 414 61 566 46 142 -1 455 68 466 49 738 429 75 142 52 342 -25 78 387 55 133 -122 83 578 Sources: INE and Ministério das Finanças. Banco de Portugal | Annual Report | 2004 161 Supplementary tables Table A.6.2 TEMPORARY EFFECTS ON THE GENERAL GOVERNMENT ACCOUNTS (NATIONAL ACCOUNTING) (a) EUR millions 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on income and wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on households. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private sector system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Civil servants system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Imputed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on production and imports . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Value added tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax on oil products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Car tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of goods and services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers from the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other capital transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0 0 0 0 373 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 169 1 169 1 169 634 206 428 143 143 143 3 257 1 957 1 957 641 214 427 353 353 353 3 052 0 0 392 963 243 894 0 0 1300 3052 Total expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intermediate consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on public debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . to households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . in kind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . to corporations (subsidies) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . other transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0 0 0 Overall balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Memo: Primary balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373 0 0 0 0 0 1300 3052 0 0 0 0 0 0 -399 0 0 0 -653 0 0 0 0 0 0 0 0 0 -399 0 -653 0 0 0 0.0 0 0.0 373 0.4 0 0.0 0 0.0 399 0.3 0 0.0 1 822 1.4 3 257 2.5 3 052 2.3 0 0.0 0 0.0 373 0.4 0 0.0 0 0.0 399 0.3 0 0.0 1 822 1.4 3 257 2.5 3 052 2.3 373 -399 -653 Sources: INE, Ministério das Finanças and Banco de Portugal. Note: (a) The amounts of temporary measures presented in the table refer only to the direct effects of the different operations, see Box “Budgetary effects of the temporary measures implemented from 2002 to 2004”. Banco de Portugal | Annual Report | 2004 162 Supplementary tables Table A.6.3 GENERAL GOVERNMENT ACCOUNTS (NATIONAL ACCOUNTING) As a percentage of GDP 1995 39.6 37.7 33.4 8.9 6.1 2.8 11.0 10.1 7.2 2.9 0.9 13.6 1996 41.0 39.0 34.4 9.5 6.4 3.1 10.9 10.2 7.1 3.0 0.7 14.0 1997 41.2 38.9 34.6 9.6 6.0 3.5 11.2 10.5 7.4 3.1 0.7 13.8 1998 41.0 39.4 34.9 9.3 5.8 3.5 11.2 10.5 7.4 3.1 0.7 14.3 1999 42.4 40.6 36.0 9.8 5.9 4.0 11.4 10.6 7.5 3.1 0.7 14.8 2000 42.3 40.8 36.6 10.4 6.1 4.3 11.8 10.9 7.7 3.2 0.9 14.4 2001 41.9 40.2 36.1 9.9 6.1 3.7 12.0 11.1 7.9 3.2 0.9 14.2 2002 43.3 41.4 37.0 9.8 5.9 3.8 12.3 11.4 8.0 3.4 0.9 15.0 2003 44.6 41.8 37.6 9.2 5.9 3.3 12.8 11.7 8.1 3.6 1.1 15.5 2004 45.4 41.6 37.1 9.2 5.8 3.4 12.9 11.9 7.9 3.9 1.1 15.0 6.8 2.7 0.8 1.9 2.4 1.9 0.1 1.6 0.2 7.2 2.7 0.9 2.0 2.6 2.1 0.1 1.9 0.1 7.2 2.5 0.9 2.1 2.3 2.3 0.1 1.8 0.5 7.5 2.5 1.0 2.2 2.2 1.6 0.1 1.4 0.1 7.7 2.4 1.1 2.5 2.2 1.8 0.1 1.6 0.1 8.0 1.7 1.1 2.5 1.7 1.4 0.1 1.3 0.0 7.8 2.0 1.0 2.3 1.7 1.8 0.1 1.5 0.2 8.3 2.3 0.9 2.4 2.1 1.8 0.1 1.5 0.2 8.9 2.4 0.8 2.4 1.8 2.8 0.1 1.4 1.3 8.3 2.3 0.8 2.4 2.0 3.8 0.0 1.1 2.7 Total expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intermediate consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on public debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . to households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . in kind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . to corporations (subsidies). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . other transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45.0 39.8 13.6 3.7 6.3 16.2 13.2 11.8 1.4 1.3 1.6 5.3 3.7 1.5 45.8 39.8 13.7 3.9 5.4 16.8 13.4 11.8 1.5 1.5 1.9 6.0 4.2 1.8 44.8 38.5 13.8 3.9 4.2 16.5 13.3 11.7 1.6 1.2 2.0 6.3 4.4 2.0 44.1 38.1 14.0 3.8 3.5 16.9 13.4 11.7 1.6 1.5 2.1 6.0 3.9 2.0 45.2 39.3 14.4 4.2 3.2 17.5 13.6 11.9 1.7 1.7 2.2 5.9 4.1 1.8 45.1 40.1 15.0 4.4 3.2 17.5 14.0 12.4 1.7 1.1 2.4 5.0 3.8 1.2 46.3 40.8 15.1 4.3 3.2 18.2 14.5 12.7 1.8 1.3 2.5 5.5 4.0 1.5 46.0 41.8 15.4 4.3 3.0 19.0 15.1 13.2 1.9 1.5 2.5 4.2 3.6 0.6 47.5 43.0 15.0 3.7 2.9 21.4 17.1 14.3 2.9 1.6 2.7 4.6 3.3 1.2 48.3 43.6 15.0 3.8 2.8 22.0 17.9 14.9 3.0 1.6 2.5 4.7 3.3 1.4 Overall balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overall balance excluding temporary measures . . . . . . . . . . . . . . . . . . . -5.5 -5.5 -4.8 -4.8 -3.6 -4.0 -3.2 -3.2 -2.8 -2.8 -2.8 -3.2 -4.4 -4.4 -2.7 -4.1 -2.9 -5.4 -2.9 -5.2 Memo: Primary current expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Primary balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Primary balance excluding temporary measures . . . . . . . . . . . . . . . Public debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.5 0.8 0.8 64.3 34.4 0.6 0.6 62.9 34.2 0.7 0.3 59.1 34.7 0.3 0.3 55.0 36.1 0.4 0.4 54.3 36.9 0.4 0.0 53.3 37.7 -1.2 -1.2 55.9 38.7 0.3 -1.1 58.5 40.1 0.0 -2.5 60.0 40.8 -0.1 -2.3 61.8 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on income and wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private sector system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Civil servants system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Imputed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on production and imports . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Value added tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax on oil products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Car tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of goods and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers from the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . Other capital transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sources: INE, Ministério das Finanças and Banco de Portugal. Banco de Portugal | Annual Report | 2004 163 Supplementary tables Table A.6.4 GENERAL GOVERNMENT ACCOUNTS (NATIONAL ACCOUNTING) Percentage change 1996 1997 1998 1999 2000 2001 2002 2003 2004 10.7 10.3 9.7 14.3 11.1 21.4 6.3 7.7 5.6 13.0 -9.8 9.5 8.3 7.6 8.4 9.1 2.7 22.0 10.8 11.4 12.4 9.1 2.2 6.0 7.9 10.0 9.7 5.6 4.9 6.8 8.9 8.5 8.0 9.7 14.7 13.1 10.8 10.4 10.3 12.5 7.1 21.6 8.1 8.2 8.7 7.2 5.6 10.6 6.6 7.5 8.8 13.2 12.1 14.9 10.9 9.5 9.0 10.8 31.3 4.3 5.2 4.3 4.5 0.9 6.2 -6.7 7.8 7.8 9.3 4.3 7.1 4.5 8.1 8.2 7.5 3.7 1.6 7.1 7.4 7.7 6.0 12.1 3.8 10.2 4.9 2.6 3.3 -4.0 1.5 -12.5 6.3 5.0 3.5 8.8 21.7 5.6 5.3 3.0 2.3 3.5 1.4 7.2 4.5 4.7 0.9 13.3 2.4 -0.3 13.0 5.0 17.1 14.6 15.0 18.3 4.7 26.6 -37.4 6.9 -0.5 5.6 10.5 -5.4 22.1 19.4 1.9 320.6 13.4 11.1 23.0 16.6 8.3 -26.9 18.4 -13.2 -82.6 10.7 0.8 20.4 18.5 3.6 20.9 11.5 19.3 59.3 10.7 -21.7 -0.3 9.1 -15.4 -13.8 9.5 -12.0 -54.8 3.9 22.1 -3.2 -0.7 6.4 31.6 -13.0 22.3 351.9 10.6 19.0 -3.6 5.5 25.5 7.3 17.3 6.5 9.7 9.5 6.2 -14.4 2.2 -9.6 56.6 -2.0 -4.6 495.1 -3.3 0.6 14.0 6.3 12.5 40.7 -81.6 -17.0 111.2 Total expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intermediate consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on public debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . to households . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . in kind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . to corporations (subsidies). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . other transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5 6.8 7.6 12.7 -8.4 10.7 8.2 7.4 14.7 18.3 25.0 21.1 19.2 25.7 5.5 4.2 8.6 7.2 -14.8 6.0 7.0 6.3 12.2 -10.3 11.5 14.2 12.6 17.7 6.9 7.6 9.8 5.8 -11.4 11.2 9.2 9.1 9.5 28.5 14.1 2.4 -1.7 11.2 9.7 10.3 10.7 17.6 -0.8 10.5 9.0 8.3 13.7 22.9 11.9 6.4 12.5 -5.4 6.6 9.1 11.0 13.0 6.3 7.1 10.4 11.2 5.0 -32.0 16.9 -10.0 -0.8 -31.1 8.9 8.0 6.8 4.5 5.5 10.3 9.2 8.6 13.7 28.0 9.0 15.9 10.0 35.6 4.1 7.2 6.9 3.6 0.3 9.6 9.1 9.3 8.0 18.7 7.4 -19.5 -5.7 -56.6 5.1 4.6 -1.1 -12.7 -3.0 14.4 15.8 10.0 56.9 10.6 8.1 10.1 -5.9 103.7 5.2 5.1 3.9 6.1 1.4 6.2 8.0 8.2 7.0 6.3 -5.0 6.9 3.3 16.8 Memo: Primary current expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.7 7.1 10.0 11.4 9.4 8.2 7.8 5.2 5.3 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on income and wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on households. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private sector system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Civil servants system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Imputed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes on production and imports . . . . . . . . . . . . . . . . . . . . . . . . . of which: Value added tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax on oil products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Car tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of goods and services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers from the European Union . . . . . . . . . . . . . . . . . . . . . . . . . Other capital transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sources: INE and Ministério das Finanças. Banco de Portugal | Annual Report | 2004 164 Supplementary tables Table A.6.5 GENERAL GOVERNMENT DEFICIT AND CHANGE IN THE DEBT EUR millions General government overall balance (Excessive Deficit Procedure) . . . . . . . . Impact of the swap and forward rate agreements operations. . . . . . . . . . . . General government overall balance (ESA95) . . . . . . . . . . . . . . . . . . . . . . . . . . Statistical discrepancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net transactions in financial assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . Transactions in major assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Privatisations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity injections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net transactions in other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . Transactions in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transactions in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transactions in major assets (debt instruments) . . . . . . . . . . . . . . . . . . . . . . . Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medium and long-term securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans from Banco de Portugal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation effects in debt instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign holding gains and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other valuation effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other changes in volume in debt instruments . . . . . . . . . . . . . . . . . . . . . . . . . . Change in debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 -4 418 -4 -4 423 0 -4 423 1 454 1 794 -15 96 -420 -665 173 72 66 -173 -239 5 943 1 360 537 4 121 9 -83 -36 -221 185 -487 5 419 -4 106 -9 -4 115 0 -4 115 -1 666 -218 144 90 -1 683 -1 900 224 -6 868 806 -62 3 317 1 198 53 3 267 0 -1 200 -768 -246 -522 -252 2 297 -3 332 7 -3 325 0 -3 325 -3 320 368 -105 97 -3 680 -4 091 687 -275 516 680 164 521 708 -1 699 2 846 1 -1 335 325 530 -206 -140 706 -3 193 -8 -3 201 0 -3 201 -1 327 718 191 193 -2 429 -2 556 660 -533 -905 -285 620 968 189 -3 544 4 789 4 -470 -269 -136 -133 -175 525 -3 073 -26 -3 099 0 -3 099 -176 688 47 129 -1 041 -1 493 348 103 -163 -133 30 2 760 520 -1 032 2 989 2 281 367 250 117 42 3 168 -3 266 -81 -3 348 0 -3 348 -1 270 -680 278 162 -1 031 -2 313 1 146 136 645 200 -445 2 722 1 190 -354 1 958 -39 -33 18 211 -193 169 2 909 -5 336 -72 -5 408 0 -5 408 -1 551 -1 792 169 153 -80 -415 389 -55 3 304 2 880 -424 7 161 1 114 1 722 3 561 0 765 -398 -20 -378 136 6 899 -3 466 -49 -3 515 0 -3 515 2 620 1 573 149 281 616 -406 1 139 -117 965 -33 -998 7 100 1 084 -1 787 7 241 0 562 -234 101 -335 -191 6 676 -3 804 -64 -3 868 0 -3 868 -48 -1 255 93 387 727 0 417 310 -234 298 532 3 586 416 3 529 -504 0 144 -196 -185 -11 -145 3 245 -3 953 -32 -3 985 0 -3 985 -617 -226 -125 109 -376 -1 481 867 237 2 419 1 493 -926 5 788 109 5 847 -1 425 0 1 256 -248 18 -265 -349 5 191 Sources: INE, Ministério das Finanças and Banco de Portugal. Banco de Portugal | Annual Report | 2004 165 Supplementary tables Table A.7.1 FINANCIAL ACCOUNT(a) (to be continued) As a percentage of GDP Change in liabilities 1996 Change in assets Net change Change in liabilities 1997 Change in assets Net change Change in liabilities 1998 Change in assets Net change Current and capital account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) off-shores . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.6 1.2 1.2 3.7 -0.1 6.8 - -8.1 -0.7 -0.6 -5.1 0.0 -1.7 -0.7 -1.9 3.5 0.5 0.6 -1.4 0.0 5.1 -0.7 21.0 2.2 2.0 7.7 -0.2 11.3 - -16.9 -2.0 -1.6 -7.1 0.2 -6.8 -1.2 -3.1 4.1 0.3 0.4 0.6 0.0 4.5 -1.2 19.5 2.7 1.4 4.8 -0.9 12.9 - -14.8 -3.6 -2.9 -5.4 1.0 -6.3 -0.5 -4.7 4.7 -0.9 -1.5 -0.6 0.1 6.6 -0.5 By institutional sector of the resident investor: Monetary authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) off-shores . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other monetary financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) off-shores . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-monetary financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) off-shores . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-financial corporations and private individuals. . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) off-shores . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2 0.0 0.2 1.5 0.0 0.0 1.8 0.0 -0.3 6.6 0.1 0.1 0.4 -0.1 6.2 0.1 0.0 0.0 0.0 0.0 0.0 3.3 1.1 1.1 1.5 0.0 0.7 -0.7 0.0 0.0 0.0 -0.7 0.0 0.0 0.0 0.0 0.0 0.0 -3.7 -0.1 -0.1 -2.7 0.0 -1.0 -3.5 -0.1 -0.1 -2.2 0.0 -1.2 -0.2 -0.5 -0.4 -0.2 0.0 0.4 -0.5 0.0 0.0 0.2 -0.7 1.5 0.0 0.0 1.8 0.0 -0.3 2.9 0.0 0.0 -2.3 0.0 5.3 -3.4 -0.1 -0.1 -2.2 0.0 -1.2 3.1 0.6 0.6 1.3 0.0 1.2 1.6 0.0 1.6 4.4 0.0 0.0 4.4 0.0 0.1 9.7 0.2 0.0 0.9 -0.2 8.8 0.1 0.0 0.1 0.1 0.0 0.0 5.2 1.9 1.9 2.4 0.0 0.9 -1.2 0.0 0.0 0.0 -1.2 0.0 0.0 0.0 0.0 0.0 0.0 -8.3 -0.4 -0.4 -2.5 0.2 -5.5 -3.9 -0.1 -0.1 -3.8 0.0 0.0 -3.6 -1.4 -1.1 -0.8 0.0 -1.3 0.4 0.0 0.0 1.6 -1.2 4.5 0.0 0.0 4.4 0.0 0.1 1.4 -0.2 -0.4 -1.7 0.0 3.3 -3.8 -0.1 -0.1 -3.7 0.0 0.0 1.6 0.5 0.8 1.6 0.0 -0.5 0.7 0.0 0.7 4.5 0.0 0.0 4.5 0.0 -0.1 9.6 0.2 0.1 -0.8 -0.8 11.0 1.8 1.3 0.2 0.4 0.0 0.1 2.9 1.2 1.1 0.7 -0.1 1.0 -0.6 0.0 0.0 -0.1 -0.5 0.0 0.0 0.0 0.0 0.0 0.0 -3.9 -0.1 0.0 -1.3 0.9 -3.4 -4.5 -0.1 -0.1 -3.8 0.0 -0.6 -5.9 -3.4 -2.7 -0.3 0.1 -2.2 0.2 0.0 0.0 0.7 -0.5 4.5 0.0 0.0 4.5 0.0 -0.1 5.7 0.1 0.1 -2.1 0.1 7.6 -2.8 1.2 0.1 -3.5 0.0 -0.5 -3.0 -2.2 -1.6 0.4 0.0 -1.2 Errors and omissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1.6 -1.0 0.0 Sources: INE and Banco de Portugal. Note: (a) A (+) sign means an increase in foreign liabilities or a decrease in foreign assets, i.e. a financial inflow. A (-) sign means a decrease in foreign liabilities or an increase in foreign assets, i.e. a financial outflow. Banco de Portugal | Annual Report | 2004 166 Supplementary tables Table A.7.1 FINANCIAL ACCOUNT(a) (to be continued) As a percentage of GDP 1999 2000 2001 Change in liabilities Change in assets Net change Change in liabilities Change in assets Net change Change in liabilities Change in assets Net change Current and capital account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) off-shores. . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.6 1.0 0.8 8.8 -2.2 6.0 - -6.0 -2.8 -3.7 -5.6 2.3 0.4 -0.3 -6.3 7.7 -1.8 -2.8 3.2 0.2 6.4 -0.3 28.5 6.2 6.0 2.6 -3.1 22.9 - -19.1 -7.6 -5.2 -4.4 3.4 -10.2 -0.4 -8.9 9.4 -1.4 0.9 -1.8 0.3 12.7 -0.4 25.6 5.7 2.6 8.9 -2.6 13.6 - -16.4 -5.7 -2.4 -7.1 2.9 -5.7 -0.8 -9.1 9.2 0.1 0.2 1.7 0.3 7.9 -0.8 By institutional sector of the resident investor: Monetary authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General government. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) off-shores. . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other monetary financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) off-shores. . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-monetary financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) off-shores. . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-financial corporations and private individuals . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) off-shores. . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0.2 0.0 -0.2 6.7 0.0 0.0 6.7 0.0 0.0 4.0 -0.5 -0.6 0.3 -1.9 6.2 -0.1 0.0 0.0 -0.2 -0.1 0.3 3.3 1.6 1.5 2.0 -0.1 -0.1 -0.8 0.3 0.0 -0.8 -0.3 -0.2 0.0 0.0 -0.2 0.0 0.0 2.6 -0.2 -0.2 -0.1 2.1 0.8 -5.4 -0.1 -0.1 -5.3 0.2 -0.2 -2.2 -2.5 -3.4 -0.3 0.1 0.6 -1.0 0.3 0.0 -1.0 -0.3 6.5 0.0 0.0 6.5 0.0 0.0 6.6 -0.8 -0.8 0.3 0.2 6.9 -5.5 -0.1 -0.1 -5.5 0.0 0.1 1.1 -0.9 -1.9 1.6 -0.1 0.5 4.3 0.0 4.3 2.0 0.0 0.0 2.3 -0.1 -0.2 15.6 1.0 1.0 0.2 -2.7 17.1 0.8 1.1 1.1 -0.3 -0.2 0.2 5.8 4.1 3.9 0.4 -0.1 1.4 -0.8 -0.5 0.0 0.0 -0.4 -0.1 0.0 0.0 -0.4 0.3 0.0 -4.0 -0.9 -0.9 0.9 2.9 -6.8 -2.1 -0.2 -0.2 -3.3 0.2 1.2 -12.1 -6.6 -4.1 -1.0 0.0 -4.5 3.5 -0.5 0.0 4.3 -0.4 1.9 0.0 0.0 1.9 0.2 -0.2 11.7 0.1 0.1 1.0 0.2 10.3 -1.3 0.9 1.0 -3.6 0.0 1.3 -6.3 -2.4 -0.2 -0.7 -0.1 -3.1 0.1 0.0 0.1 2.5 0.0 0.0 3.2 -0.5 -0.2 13.5 0.1 0.1 1.9 -1.7 13.1 1.1 0.2 0.3 0.9 -0.2 0.1 8.5 5.4 2.3 2.9 -0.2 0.4 -0.4 0.4 0.0 0.0 -0.8 0.3 0.0 0.0 -0.3 0.6 0.0 0.0 -0.3 -0.3 -0.6 1.9 -1.0 -5.9 -0.1 -0.1 -4.7 0.2 -1.4 -10.4 -5.3 -2.1 -2.0 0.2 -3.3 -0.3 0.4 0.0 0.1 -0.8 2.8 0.0 0.0 2.9 0.1 -0.2 13.4 -0.2 -0.2 1.3 0.2 12.1 -4.8 0.2 0.2 -3.8 0.0 -1.2 -2.0 0.1 0.2 0.9 0.0 -2.9 Errors and omissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1.4 -0.5 0.0 Sources: INE and Banco de Portugal. Note: (a) A (+) sign means an increase in foreign liabilities or a decrease in foreign assets, i.e. a financial inflow. A (-) sign means a decrease in foreign liabilities or an increase in foreign assets, i.e. a financial outflow. Banco de Portugal | Annual Report | 2004 167 Supplementary tables Table A.7.1 FINANCIAL ACCOUNT(a) (continued) As a percentage of GDP 2002 2003 2004 Change in liabilities Change in assets Net change Change in liabilities Change in assets Net change Change in liabilities Change in assets Net change Current and capital account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) off-shores. . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.7 1.5 1.4 8.3 -3.1 8.0 - -9.2 -0.1 -2.6 -5.9 3.1 -5.5 -0.9 -6.0 5.4 1.3 -1.2 2.4 0.0 2.6 -0.9 21.8 4.4 -0.1 10.5 -3.1 9.9 - -18.2 -5.0 0.0 -14.4 3.1 -6.4 4.4 -3.3 3.6 -0.5 -0.1 -3.9 0.0 3.5 4.4 14.3 0.7 0.9 7.7 -2.4 8.3 - -7.3 -3.7 -1.7 -6.8 2.4 -0.3 1.1 -5.9 7.0 -3.0 -0.8 0.9 0.0 8.0 1.1 By institutional sector of the resident investor: Monetary authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General government. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) off-shores. . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other monetary financial institutions(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) off-shores. . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-monetary financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) off-shores. . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-financial corporations and private individuals . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . excluding Madeira and Santa Maria (Azores) off-shores. . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8 0.0 0.8 2.7 0.0 0.0 3.1 -0.6 0.1 5.4 0.1 0.2 0.0 -2.0 7.4 3.1 0.5 0.3 2.2 -0.2 0.7 2.7 0.8 0.9 3.1 -0.2 -0.9 -0.7 0.4 0.0 -0.2 -0.9 0.4 0.0 0.0 -0.4 0.8 0.0 0.8 -0.1 -0.1 -0.5 1.9 -0.5 -3.2 -0.1 -0.1 -3.3 0.2 0.1 -6.6 0.1 -2.4 -2.1 0.2 -4.8 0.1 0.4 0.0 0.6 -0.9 3.1 0.0 0.0 2.8 0.2 0.1 6.3 0.1 0.2 -0.6 -0.1 6.9 -0.1 0.3 0.2 -1.2 0.0 0.7 -3.9 0.9 -1.5 1.0 0.0 -5.7 -4.3 (1.9) 0.0 -4.3 (1.9) 3.7 0.0 0.0 4.3 -0.5 0.0 11.6 0.2 0.2 0.0 -1.9 13.4 6.6 -1.1 -0.7 8.0 -0.5 0.2 4.2 5.4 0.5 -1.8 -0.1 0.7 0.8 -3.9 0.0 0.3 4.4 0.2 0.0 0.0 -0.2 0.5 0.0 -8.3 (-14.4) -0.2 -0.2 -4.2 2.0 -5.9 (-12.1) -2.9 0.1 0.1 -3.7 0.5 0.2 -8.1 -4.9 0.1 -2.4 0.1 -1.0 -3.5 (2.7) -3.9 0.0 -4.0 (2.1) 4.4 3.9 0.0 0.0 4.0 -0.1 0.0 3.4 (-2.8) 0.0 0.0 -4.2 0.1 7.5 (1.4) 3.7 -1.1 -0.6 4.4 0.0 0.4 -4.0 0.5 0.6 -4.1 0.0 -0.4 1.3 0.7 0.0 -0.6 1.1 0.3 0.0 0.0 -0.1 0.2 0.1 -2.5 (0.9) -0.2 -0.2 -3.4 1.5 -0.5 (3.0) -2.5 0.0 0.0 -3.0 0.5 -0.1 -3.8 -3.5 -1.5 -1.1 0.1 0.7 5.7 (2.2) 0.7 0.0 3.8 (0.3) 1.1 4.4 0.0 0.0 4.0 0.0 0.4 -4.4 (-0.9) -1.7 -1.7 -4.2 0.0 1.5 (5.0) 2.7 1.6 1.6 1.0 0.0 0.2 -1.4 -2.9 -0.7 -0.6 0.0 2.1 Errors and omissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6 -0.3 4.4 (0.9) 0.0 4.4 (0.9) 4.1 0.0 0.0 4.1 -0.2 0.3 -1.9 -1.5 -1.5 -0.8 -1.5 2.0 5.2 1.6 1.5 3.9 -0.5 0.2 2.4 0.6 0.8 0.5 -0.1 1.4 -1.1 Sources: INE and Banco de Portugal. Notes: (a) A (+) sign means an increase in foreign liabilities or a decrease in foreign assets, i.e. a financial inflow. A (-) sign means a decrease in foreign liabilities or an increase in foreign assets, i.e. a financial outflow. (b) The values in brackets in “Other investment” of monetary authorities and of other monetary financial institutions are adjusted for temporary end-of-year transactions between those sectors, which were reverted in the first days of the following year. Banco de Portugal | Annual Report | 2004 168 Supplementary tables Table A.7.2 INTERNATIONAL INVESTMENT POSITION End-of-period position, EUR millions 1999 2000 2001 2002 2003 2004 Transactions Price changes Exchange Other rate changes adjustments End-of-period position International investment position. . . . . . . . . . . . . . . . . . . . Direct investment(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment(b) . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivates . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -35 592 -13 176 -15 189 640 -21 902 14 035 -45 675 -12 295 -12 629 575 -36 615 15 289 -53 776 -14 093 -12 081 845 -45 560 17 112 -62 223 -19 293 -12 097 479 -48 192 16 879 -69 866 -18 455 -9 314 -28 -52 216 10 146 -9 440 4 081 -1 201 55 -10 842 -1 533 -1 295 53 -601 -668 22 -102 182 -9 -141 0 265 67 -318 -102 6 0 -223 0 -80 738 -14 432 -11 250 -640 -62 993 8 578 By institutional sector of the resident investor: Monetary authorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivates . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivates . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other monetary financial institutions . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivates . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-monetary financial institutions . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivates . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-financial corporations and private individuals . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment. . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivates . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 806 6 019 0 -1 248 14 035 -27 237 0 -25 571 372 -2 038 -19 859 182 -2 149 267 -18 160 14 896 -2 238 16 748 0 385 -22 198 -11 121 -10 235 0 -842 15 352 6 621 0 -6 559 15 289 -30 015 0 -28 378 353 -1 990 -34 616 -589 -4 229 221 -30 019 20 465 -2 885 23 148 1 201 -16 860 -8 821 -9 791 0 1 752 16 490 6 189 -2 -6 810 17 112 -31 476 0 -31 713 429 -192 -51 476 -376 -6 498 416 -45 018 25 056 -3 984 27 449 1 1 590 -12 370 -9 732 -7 508 1 4 869 15 693 5 690 7 -6 884 16 879 -36 827 0 -36 514 79 -392 -57 716 -962 -3 938 393 -53 208 26 428 -3 267 28 999 0 697 -9 802 -15 064 -6 334 0 11 595 19 718 10 809 4 -1 242 10 146 -41 430 0 -41 200 234 -465 -62 975 -1 404 1 149 -266 -62 454 20 865 -1 932 22 644 0 153 -6 044 -15 120 -2 716 0 11 792 -7 638 -954 -1 -5 150 -1 533 -5 964 0 -5 414 21 -570 5 936 2 250 5 678 22 -2 014 -3 620 -2 125 -1 308 43 -230 1 846 3 956 797 -30 -2 878 -117 -34 -3 22 -102 -1 243 0 -726 -517 0 -194 -62 -8 -125 0 928 -4 985 -52 0 -670 119 -819 30 0 47 0 0 -20 67 -48 0 10 0 -58 381 -3 99 0 285 -183 -6 -144 0 -33 -15 0 -106 0 91 42 6 0 36 0 -112 0 0 0 -112 -646 7 0 0 -653 25 -2 0 0 27 373 -106 0 0 479 12 052 9 828 0 -6 354 8 578 -48 797 0 -47 330 -262 -1 205 -57 498 788 6 918 -369 -64 836 18 015 -4 070 22 177 -9 -83 -4 510 -11 151 -2 843 0 9 484 Sources: INE and Banco de Portugal. Notes: (a) Includes quarterly estimates by Banco de Portugal based on the accumulation of monthly flows and on the available annual data obtained from Direct Investment Surveys. (b) Includes quarterly estimates by Banco de Portugal based on the accumulation of monthly flows and on the available annual data obtained from the “Survey on stocks of foreign securities held by residents”. (c) Includes, in some components, quarterly estimates by Banco de Portugal, based on the accumulation of monthly flows. Banco de Portugal | Annual Report | 2004 169 Supplementary tables Table A.7.3 INTERNATIONAL INVESTMENT POSITION As a percentage of GDP 1999 2000 2001 2002 2003 2004 International investment position . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32.9 -12.2 -14.1 0.6 -20.3 13.0 -39.5 -10.6 -10.9 0.5 -31.7 13.2 -43.9 -11.5 -9.9 0.7 -37.2 14.0 -48.4 -15.0 -9.4 0.4 -37.5 13.1 -53.5 -14.1 -7.1 0.0 -40.0 7.8 -59.7 -10.7 -8.3 -0.5 -46.6 6.3 By institutional sector of the resident investor: Monetary authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other monetary financial institutions . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-monetary financial institutions . . . . . . . . . . . . . . . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-financial corporations and private individuals . . . . . . . . . . Direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.4 5.6 0.0 -1.2 13.0 -25.2 0.0 -23.7 0.3 -1.9 -18.4 0.2 -2.0 0.2 -16.8 13.8 -2.1 15.5 0.0 0.4 -20.5 -10.3 -9.5 0.0 -0.8 13.3 5.7 0.0 -5.7 13.2 -26.0 0.0 -24.6 0.3 -1.7 -30.0 -0.5 -3.7 0.2 -26.0 17.7 -2.5 20.0 0.0 0.2 -14.6 -7.6 -8.5 0.0 1.5 13.5 5.1 0.0 -5.6 14.0 -25.7 0.0 -25.9 0.3 -0.2 -42.0 -0.3 -5.3 0.3 -36.7 20.4 -3.3 22.4 0.0 1.3 -10.1 -7.9 -6.1 0.0 4.0 12.2 4.4 0.0 -5.4 13.1 -28.7 0.0 -28.4 0.1 -0.3 -44.9 -0.7 -3.1 0.3 -41.4 20.6 -2.5 22.6 0.0 0.5 -7.6 -11.7 -4.9 0.0 9.0 15.1 (8.9) 8.3 0.0 -1.0 (-7.1) 7.8 -31.7 0.0 -31.6 0.2 -0.4 -48.2 (-42.0) -1.1 0.9 -0.2 -47.8 (-41.6) 16.0 -1.5 17.3 0.0 0.1 -4.6 -11.6 -2.1 0.0 9.0 8.9 (6.4) 7.3 0.0 -4.7 (-7.2) 6.3 -36.1 0.0 -35.0 -0.2 -0.9 -42.5 (-40.0) 0.6 5.1 -0.3 -48.0 (-45.5) 13.3 -3.0 16.4 0.0 -0.1 -3.3 -8.2 -2.1 0.0 7.0 Memo: Equity shares and direct investment . . . . . . . . . . . . . . . . . . . Debt(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25.0 -8.0 -22.9 -16.6 -20.5 -23.3 -21.5 -27.0 -21.3 -32.2 -18.6 -41.1 Sources: INE and Banco de Portugal. Notes: (a) Includes quarterly estimates by Banco de Portugal based on the accumulation of monthly flows and on the available annual data obtained from Direct Investment Surveys. (b) Includes quarterly estimates by Banco de Portugal based on the accumulation of monthly flows and on the available annual data obtained from the “Survey on stocks of foreign securities held by residents”. (c) Includes, in some components, quarterly estimates by Banco de Portugal, based on the accumulation of monthly flows. (d) Includes securities, other investment, financial derivatives and other financial instruments not included under “Equity shares and direct investment”. Banco de Portugal | Annual Report | 2004 170 Supplementary tables Table A.7.4 NET ISSUANCE OF SECURITIES BY RESIDENTS IN THE EXTERNAL AND INTERNAL MARKETS BY INSTITUTIONAL SECTOR EUR millions 1996 Net issuance by residents Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monetary financial institutions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-monetary financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Asset-backed bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-financial corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monetary financial institutions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-monetary financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Securitisation units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-financial corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment fund units: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Money market fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Mutual fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Real estate fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public sale offerings Privatisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Memo: Net issuance of debt securities by residents in the external market(b) . . . . . . . . . . . . . . . . . . . . Issuance of shares by incorporation of reserves(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net issuance abroad by non-resident entities that are branches and subsidiaries of resident entities: Financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1997 1998 1999 2000 2001 2002 2003 2004 5082 2488 563 792 1351 254 477 -105 5630 1667 2031 526 6366 2896 735 245 6293 1920 4041 -153 10620 5471 2777 39 9489 6583 44 -198 6519 4457 1830 1588 8140 6580 -1425 1356 0 1239 3069 711 369 0 724 3314 351 61 0 1406 6609 2239 91 0 2489 7897 513 396 0 485 14071 3285 1661 0 2332 9819 800 2023 0 3060 8581 459 3861 1765 -1356 13532 1158 8825 182 1629 9785 747 5419 0 1989 - 0 2901 - 0 4279 - 0 6988 - 0 9125 - 999 6996 1036 2577 4262 1315 8798 3549 2265 4395 3619 1999 - - - - - 54 501 385 1 - - - - - 304 44 1220 1060 - - - - - 678 770 660 938 491 24 1985 38 2189 495 572 120 1057 195 122 1 0 3 8 47 0 16 1296 164 3132 3213 4 711 1746 618 202 1860 3339 767 -2405 439 -1655 129 -1582 51 - - - 3877 1509 6926 106 6604 2825 6573 950 7562 445 7030 91 Sources: CMVM and Banco de Portugal. Notes: (a) Excluding investment fund units. (b) Included in “Debt securities”. (c) Included in “Shares and other equity”. Banco de Portugal | Annual Report | 2004 171 Supplementary tables Table A.7.5 NET ISSUANCE OF SECURITIES BY RESIDENTS IN THE EXTERNAL AND INTERNAL MARKETS BY TYPE OF INSTRUMENT EUR millions 1996 1997 1998 1999 2000 2001 2002 2003 2004 Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Government securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial paper, Treasury bills and other short-term securities (excluding CEDICs)(a) . . CEDICs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed-rate Treasury bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Variable-rate Treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other government securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial paper and other short-term securities (except general government)(b) . . . . . . . . . . . . Classical bonds (excluding bonds issued by the general government and asset-backed bonds) . Cash certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Convertible bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5082 2488 -228 0 3754 -1039 0 962 968 1896 -2 116 0 -14 -1331 1351 254 -1387 0 7061 -5420 0 -654 1699 1852 -22 0 0 -139 -1638 5630 1667 -3598 0 5900 -635 0 1720 178 2660 0 96 0 -14 -678 6366 2896 -1050 0 7465 -3518 0 1767 -1152 3080 509 71 0 -7 -798 6293 1920 -351 382 2489 -600 0 1444 294 2993 0 0 0 -16 -342 10620 5471 1720 181 5851 -2280 0 1747 2057 582 975 -37 0 -2 -174 9489 6583 -1937 860 9422 -1778 16 2904 662 -230 700 0 0 -42 -1088 6519 4457 3810 130 1356 -946 107 -924 352 2157 -168 -139 1765 0 -981 8140 6580 6094 825 442 -658 -123 1682 230 906 -450 -75 182 4 -917 Shares and other equity Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Listed companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-listed companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securitisation units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3069 681 2389 – 0 3314 573 2741 – 0 6609 2655 3955 – 0 7897 1524 6373 – 0 14071 3967 10104 – 0 8820 2501 6319 1036 999 6005 1012 4993 1315 2577 4734 963 3771 2265 8798 5390 1620 3770 1999 4395 Source: Banco de Portugal. Notes: (a) CEDICs - Certificados Especiais de Dívida de Curto Prazo, short-term special debt certificates issued by the central government to allocate liquidity surpluses of general government entities. (b) Including commercial paper issued with maturity over 1 year. Banco de Portugal | Annual Report | 2004 172 Supplementary tables Table A.7.6 GROSS ISSUANCE OF MEDIUM- AND LONG-TERM BONDS BY RESIDENTS IN THE EXTERNAL AND INTERNAL MARKETS BY TYPE OF RATE (A) General government EUR millions 1996 1997 1998 1999 2000 2001 2002 2003 2004 Fixed rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5085 8513 8775 10063 7703 8634 13123 7585 6716 Indexed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Euribor or Lisbor . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock price quotations and indices . . . . . . . . . . PSI-20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other benchmarks . . . . . . . . . . . . . . . . . . . . . . . . 3703 3703 2793 910 0 0 0 0 1035 959 734 225 0 0 0 76 361 361 85 276 0 0 0 0 40 25 25 0 0 0 0 15 0 0 0 0 0 0 0 0 134 134 134 0 0 0 0 0 30 30 30 0 0 0 0 0 157 157 157 0 0 0 0 0 0 0 0 0 0 0 0 0 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8788 9548 9135 10103 7703 8768 13153 7742 6716 Sources: IGCP, Euronext Lisboa, financial intermediaries and major national newspapers (pursuant to the provisions laid down in Decree-Law No 142-A/91 of 10 April). Banco de Portugal | Annual Report | 2004 173 Supplementary tables Table A.7.6 GROSS ISSUANCE OF MEDIUM- AND LONG-TERM BONDS BY RESIDENTS IN THE EXTERNAL AND INTERNAL MARKETS BY TYPE OF RATE (B) Financial institutions EUR millions 1996 1997 1998 1999 2000 2001 2002 2003 2004 Fixed rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 130 194 1151 1418 2190 3569 2886 3229 Indexed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Euribor or Lisbor . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock price quotations and indices . . . . . . . . . . PSI-20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other benchmarks . . . . . . . . . . . . . . . . . . . . . . . . 2364 2020 1922 98 67 67 0 277 3626 2628 2579 50 316 177 140 681 3251 2020 1994 26 831 254 577 400 3203 1922 1922 0 59 59 0 1222 4816 3191 2773 417 646 8 639 979 5141 3859 2479 1380 1277 20 1257 5 3164 2107 1949 158 1018 0 1018 39 6265 5276 5211 65 687 0 687 302 4013 3321 3312 10 579 0 579 113 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2761 3756 3445 4354 6234 7331 6732 9151 7242 Sources: IGCP, Euronext Lisboa, financial intermediaries and major national newspapers (pursuant to the provisions laid down in Decree-Law No 142-A/91 of 10 April). Banco de Portugal | Annual Report | 2004 174 Supplementary tables Table A.7.6 GROSS ISSUANCE OF MEDIUM- AND LONG-TERM BONDS BY RESIDENTS IN THE EXTERNAL AND INTERNAL MARKETS BY TYPE OF RATE (C) Non-financial institutions EUR millions 1996 1997 1998 1999 2000 2001 2002 2003 2004 Fixed rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 255 167 1512 0 1574 16 12 214 Indexed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Euribor or Lisbor . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock price quotations and indices . . . . . . . . . . PSI-20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other benchmarks . . . . . . . . . . . . . . . . . . . . . . . . 1452 1447 1397 50 0 0 0 6 1205 1205 960 244 0 0 0 0 1534 1534 1344 190 0 0 0 0 511 510 510 0 0 0 0 1 124 124 124 0 0 0 0 0 67 67 67 0 0 0 0 0 372 372 372 0 0 0 0 0 1107 1107 1107 0 0 0 0 0 872 872 872 0 0 0 0 0 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1637 1459 1701 2022 124 1641 387 1119 1086 Sources: IGCP, Euronext Lisboa, financial intermediaries and major national newspapers (pursuant to the provisions laid down in Decree-Law No 142-A/91 of 10 April). Banco de Portugal | Annual Report | 2004 175 Supplementary tables Table A.7.7 EURONEXT LISBOA: TURNOVER OF SHARES 1999 2000 2001 2002 2003 2004 PSI-20 Index - end-of-period (31-12-1992=3000) . . . 11961 10404 7831 5825 6747 7600 Issuers Number of listed companies . . . . . . . . . . . . . . . . . . . . Market with official quotations . . . . . . . . . . . . . . . . Second market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market without quotations. . . . . . . . . . . . . . . . . . . . 125 73 12 40 110 62 9 39 101 57 8 36 91 52 8 31 81 48 7 26 79 45 7 27 Stock market capitalisation (EUR millions) Value of listed shares . . . . . . . . . . . . . . . . . . . . . . . . . . Market with official quotations . . . . . . . . . . . . . . . . Second market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market without quotations. . . . . . . . . . . . . . . . . . . . 67991 67314 245 433 64658 63317 105 1236 52940 52367 111 462 42149 41755 153 242 46393 46101 107 184 54542 53890 113 539 Trading (EUR millions) Value of traded shares . . . . . . . . . . . . . . . . . . . . . . . . . Market with official quotations . . . . . . . . . . . . . . . . Second market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market without quotations. . . . . . . . . . . . . . . . . . . . Special trading sessions . . . . . . . . . . . . . . . . . . . . . . 39162 38150 5 176 831 67397 59235 44 106 8012 31393 30688 2 2 701 21794 21655 32 5 102 19713 19006 18 3 686 28171 27740 5 18 408 Source: CMVM. Banco de Portugal | Annual Report | 2004 176 Supplementary tables Table A.7.8 STOCK MARKET CAPITALISATION AS A PERCENTAGE OF GDP International comparison Per cent Euro area(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . Portugal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Euronext(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1996 1997 1998 1999 2000 2001 2002 2003 2004 35 28 41 38 21 93 143 22 - 48 40 53 49 30 128 161 38 - 62 49 65 65 45 146 154 53 - 90 72 76 111 66 185 214 62 - 88 67 88 110 70 170 185 56 - 73 58 81 91 49 131 151 43 97 48 31 64 62 37 86 107 32 67 54 40 77 69 37 86 121 35 69 58 40 87 70 43 98 121 40 71 Sources: Eurostat, Euronext and Banco de Portugal. Notes: (a) Consisted of 11 countries up to 31 December 2000; includes also Greece as from 1 January 2001. (b) Amsterdam, Brussels and Paris up to 2001; the previous plus Euronext Lisboa in 2002. Banco de Portugal | Annual Report | 2004 177 Supplementary tables Table A.7.9 TURNOVER OF BONDS 1996 1997 1998 1999 2000 2001 2002 2003 2004 Issuers on Euronext Lisboa Number of bonds issuing listed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market with official quotations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public debt(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market without quotations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 250 93 157 107 8 321 187 82 105 132 2 352 166 75 91 185 1 373 153 64 89 219 1 385 203 56 147 182 0 364 224 43 181 140 0 333 239 42 197 94 0 255 193 37 156 62 0 207 165 18 147 42 0 Stock market capitalisation on Euronext Lisboa (EUR millions) Value of outstanding bonds listed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market with official quotations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public debt(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous .......................................... Second market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33479 31623 27931 3692 1856 35473 32712 28681 4031 2761 42524 37920 33380 4540 4604 47461 42311 37544 4767 5150 49663 44480 39682 4798 5182 55034 51569 46811 4758 3465 65102 62793 57074 5719 2309 62380 61275 56308 4967 1105 53689 52658 48987 3671 1031 Trading on Euronext Lisboa (EUR millions) Regular trading sessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market with official quotations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public debt(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market without quotations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Special trading sessions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Special market for wholesale transactions (MEOG). . . . . . . . . . . . . . . . Public debt(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11230 9833 9397 1394 4 51009 50489 11363 10852 10560 509 1 74 61008 60290 5839 4836 4836 976 28 0 107829 106889 3569 2884 2552 638 47 42 154255 153675 2783 1907 1496 876 0 0 38993 38783 1626 1190 742 435 0 0 71 - 1002 574 310 428 0 0 - 1268 831 322 436 0 0 - 654 572 198 81 0 15 - Government debt trading on MEDIP and on EuroMTS (EUR millions) Special Government debt market (MEDIP) (b) . . . . . . . . . . . . . . . . . . . . . Treasury bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . European debt market (EuroMTS)(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - - 21658 21658 6980 106516 106516 16968 111163 111163 33585 132055 128245 3810 22875 135760 122110 13650 20448 Memo: Total government debt trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59887 70849 111725 156227 68916 124225 145058 155252 156406 Sources: Euronext Lisboa and IGCP. Notes: All the values concern the Euronext Lisboa unless otherwise indicated. (a) Includes other government and similar funds. (b) The MEDIP is a market managed by MTS Portugal for the negotiation of the Portuguese government debt. The Portuguese state is a shareholder of MTS Portugal through the IGCP. (c) The EuroMTS is a pan-European trading platform for government debt. Banco de Portugal | Annual Report | 2004 178 Supplementary tables Table A.7.10 DERIVATIVES STOCK EXCHANGE 1999 2000 2001 2002 2003 2004 Contracts traded (thousands) Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PSI-20 . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . PSI-20 . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . 2948 870 2078 100 27 73 5723 738 4986 177 27 150 4497 565 3932 400 20 380 3944 346 3598 28 1 27 837 214 623 12 0 12 664 115 549 - Turnover (EUR millions) . . . . . . . . . . . . . . . . . . Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PSI-20 . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . PSI-20 . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . 10339 9163 1176 11489 267 11221 12662 9007 3655 431 311 119 7011 5029 1981 260 176 83 3270 2371 899 14 11 4 1452 1275 176 9 0 9 1038 849 189 - Source: Euronext Lisboa. Banco de Portugal | Annual Report | 2004 179 Supplementary tables Table A.7.11 INSTITUTIONAL INVESTORS’ PORTFOLIO End-of-period position, EUR millions 1996 1997 1998 1999 2000 2001 2002 2003 2004 Mutual and money market funds Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Resident issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-resident issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Resident issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-resident issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: residents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 3148 11537 7984 3554 2264 1751 514 3051 2722 157 20157 3408 13446 8835 4611 3353 2411 942 3924 3475 103 24233 3493 12993 6279 6714 4182 2062 2120 3583 2924 253 24504 2288 12526 4601 7925 3976 1376 2599 2884 2397 231 21904 2754 13887 3792 10095 2871 774 2097 1858 1478 77 21447 2756 15174 3430 11745 1741 496 1244 1067 844 74 20812 3028 17222 3225 13997 1872 589 1283 1053 717 170 23345 3181 17701 2992 14709 2056 743 1312 1660 1038 104 24701 Real estate funds Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Resident issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-resident issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Resident issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-resident issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 409 36 36 0 49 49 0 2134 - 440 204 204 0 76 76 0 2417 - 447 10 10 0 97 97 0 5 2835 284 3679 523 11 11 0 228 228 0 3 3316 248 4329 634 2 2 0 121 121 0 5 4062 453 5277 590 0 0 0 197 197 0 6 4892 491 6175 551 0 0 0 199 199 0 9 6343 558 7660 Pension funds(b) Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 848 5724 879 410 433 6 8299 742 6210 1783 643 547 0 9925 727 6436 2789 678 657 0 11287 1355 6141 3654 837 793 6 12787 1549 6426 3469 1331 991 0 13766 1549 7459 2971 1527 1320 0 14826 1894 7779 2650 1280 1949 0 15552 1513 6586 3142 2687 2243 0 16171 1153 5965 3161 2563 2139 35 15016 Sources: Instituto de Seguros de Portugal and Banco de Portugal. Notes: (a) Excluding investment fund units and equity shares whenever regulatorily classified as real estate related. The latter are included under “Real estate”. (b) Data for pension funds concerning 2004 are preliminary. Banco de Portugal | Annual Report | 2004 180 Supplementary tables Table A.7.12 FINANCIAL TRANSACTIONS OF HOUSEHOLDS Consolidated values, EUR millions 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Net acquisition of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of disposable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities other than shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity excluding investment funds. . . . . . . . . . . . . . . . . . . Investment fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Life insurance and pension funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions excluding trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9771 12.1 16.4 5860 1320 451 -86 -316 229 3260 3042 219 -1033 91 -1124 9454 11.0 15.1 5534 35 -353 1049 -473 1522 3084 2853 231 106 140 -34 10420 11.2 15.7 3525 191 -935 3424 214 3210 4401 3984 417 -187 183 -370 12806 12.7 18.4 3730 2835 -90 4181 1509 2673 3175 2926 249 -1025 128 -1153 14075 13.0 19.0 7395 2252 21 1335 654 681 3710 3516 195 -638 53 -691 15027 13.0 18.6 8390 3436 -323 1784 1835 -51 3862 3488 374 -2121 152 -2273 18418 15.0 21.5 7039 4916 -63 2837 1248 1589 4755 4459 296 -1066 179 -1245 13777 10.7 15.5 2938 4092 -1 2520 910 1611 4595 4436 159 -366 7 -373 13182 10.1 14.4 654 4254 -2 2547 527 2020 3478 3374 105 2251 -89 2339 12684 9.4 13.3 4205 2764 3 1755 618 1137 3170 3250 -80 788 -26 814 Net incurrence of liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of disposable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities other than shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity excluding investment funds. . . . . . . . . . . . . . . . . . . Investment fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Life insurance and pension funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions excluding trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5438 6.7 9.1 0 0 4626 0 0 0 0 0 0 813 473 339 6398 7.4 10.2 0 0 5806 16 16 0 0 0 0 576 1119 -543 7819 8.4 11.8 0 15 7276 18 18 0 0 0 0 510 168 342 12013 11.9 17.2 0 -3 10861 31 31 0 0 0 0 1124 703 421 14171 13.1 19.1 0 -10 12910 62 62 0 0 0 0 1209 946 263 13385 11.6 16.6 0 0 12096 132 132 0 0 0 0 1156 554 602 14497 11.8 16.9 0 0 9308 169 169 0 0 0 0 5020 644 4376 9403 7.3 10.6 0 0 9396 295 295 0 0 0 0 -289 -92 -196 8509 6.5 9.3 0 2 8949 347 347 0 0 0 0 -788 108 -896 8733 6.5 9.2 0 -2 10065 365 365 0 0 0 0 -1696 -768 -927 Financial saving (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4332 5.4 3056 3.5 2601 2.8 793 0.8 -96 -0.1 1643 1.4 3922 3.2 4374 3.4 4673 3.6 3951 2.9 Financial saving - adjusted figures(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4843 3.7 Source: Banco de Portugal. Notes: (a) The financial saving of a sector in a specific year is given by the difference between transactions in financial assets and financial liabilities occurred in that year, i.e. it is equal to net lending/borrowing that result from non-financial operations. In this sense, it is the difference between resources (income and transfers) and allocations (expenditure on goods and services and transfers). (b) The adjusted figures result from the correction of the effect of the sale of tax credits by general government. Banco de Portugal | Annual Report | 2004 181 Supplementary tables Table A.7.13 FIXED-INCOME FINANCIAL ASSETS AND LIABILITIES OF HOUSEHOLDS(a) Consolidated values, EUR millions 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP. . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of disposable income . . . . . . . . . . . . . . Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities other than shares . . . . . . . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment fund units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84946 105.1 142.6 72406 1351 1735 9454 91753 106.4 146.5 77971 1349 1382 11051 98930 106.4 149.0 81996 1609 438 14887 107563 106.5 154.2 85127 4395 346 17695 118483 109.7 160.0 91823 7924 294 18442 136885 118.5 169.5 100592 16873 55 19364 150502 122.8 175.7 108238 21645 12 20607 157685 122.8 177.0 109810 26459 7 21409 164677 126.1 179.4 109956 30800 7 23914 172767 127.8 181.9 113677 33412 11 25667 Financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP. . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of disposable income . . . . . . . . . . . . . . Securities other than shares . . . . . . . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22915 28.4 38.5 0 22915 28651 33.2 45.8 0 28651 36651 39.4 55.2 15 36636 47516 47.1 68.1 12 47504 61616 57.0 83.2 1 61615 73791 63.9 91.4 0 73791 82758 67.5 96.6 0 82758 92319 71.9 103.6 0 92319 101371 77.6 110.4 3 101369 112357 83.1 118.3 1 112356 Net financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP. . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of disposable income . . . . . . . . . . . . . . 62031 76.7 104.1 63102 73.2 100.8 62279 67.0 93.8 60047 59.5 86.1 56867 52.6 76.8 63094 54.6 78.1 67744 55.3 79.1 65366 50.9 73.4 63305 48.5 69.0 60410 44.7 63.6 Source: Banco de Portugal. Note: (a) Includes interest-bearing financial instruments only. Banco de Portugal | Annual Report | 2004 182 Supplementary tables Table A.7.14 FINANCIAL TRANSACTIONS OF NON-FINANCIAL CORPORATIONS Consolidated values, EUR millions 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Net acquisition of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities other than shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity excluding investment funds. . . . . . . . . . . . . . . . . . . Investment fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Life insurance and pension funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions excluding trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5706 7.1 147 557 94 1471 1233 238 96 0 96 3342 1073 2269 8342 9.7 1958 778 52 1851 1656 195 99 0 99 3605 1510 2095 10709 11.5 1767 159 138 3168 2795 372 195 0 195 5283 700 4583 12376 12.3 3607 1285 491 6288 6013 275 88 0 88 617 867 -250 18081 16.7 1819 2785 77 9584 10375 -791 68 0 68 3748 1327 2421 16433 14.2 2889 2244 986 8678 8892 -215 135 0 135 1501 1469 32 19469 15.9 1912 3878 446 11564 11438 126 90 0 90 1580 437 1143 5246 4.1 440 1251 5848 819 664 156 43 0 43 -3156 -20 -3136 12140 9.3 4382 -1239 -678 8278 8194 84 97 0 97 1300 -61 1361 5795 4.3 1190 260 -2145 8074 8047 27 -86 0 -86 -1498 -450 -1048 Net incurrence of liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities other than shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity excluding investment funds. . . . . . . . . . . . . . . . . . . Investment fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Life insurance and pension funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions excluding trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5844 7.2 0 1181 2145 2396 2396 0 150 150 0 -27 405 -431 8307 9.6 0 1167 2446 2596 2596 0 165 165 0 1934 675 1260 13378 14.4 0 732 7212 3758 3758 0 688 688 0 987 767 220 15401 15.3 0 1390 8847 4914 4914 0 -419 -419 0 669 701 -32 21963 20.3 0 2003 10952 7897 7897 0 -384 -384 0 1496 864 632 26289.3 22.8 0 411 15796 8731 8731 0 444 444 0 907 1072 -165 28811.7 23.5 0 2321 15809 8603 8603 0 374 374 0 1704 -132 1836 12600.5 9.8 0 3061 6288 4716 4716 0 -589 -589 0 -876 -782 -94 18109.2 13.9 0 -1290 6002 10851 10851 0 1373 1373 0 1174 -71 1245 11492.7 8.5 0 1685 2363 5535 5535 0 545 545 0 1366 688 678 Financial saving (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -137 -0.2 35 0.0 -2669 -2.9 -3025 -3.0 -3882 -3.6 -9857 -8.5 -9342.9 -7.6 -7355 -5.7 -5969 -4.6 -5698 -4.2 -3079 -2.4 -5151 -3.8 47 -54 Financial saving - adjusted figures(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statistical discrepancy(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 744 118 168 441 -464 321 883 Sources: INE and Banco de Portugal. Notes: (a) The financial saving of a sector in a specific year is given by the difference between transactions in financial assets and financial liabilities occurred in that year, i.e. it is equal to net lending/borrowing that result from non-financial operations. In this sense, it is the difference between resources (income and transfers) and allocations (expenditure on goods and services and transfers). (b) The adjusted figures result from the correction, in 2003, of the effect of the sale of tax credits by general government, in 2003, and of transfers of pension funds from public undertakings to Caixa Geral de Aposentações, namely the transfer from the Post Office (€1300.0 million) in 2003 and the transfers from Navegação Aérea de Portugal (€ 235.7 million), Aeroportos de Portugal (€173.6 million) and Imprensa Nacional Casa da Moeda (€137.8 million) in 2004. (c) Statistical discrepancy is the difference between financial saving and net lending/borrowing (see note (a)). Banco de Portugal | Annual Report | 2004 183 Supplementary tables Table A.7.15 FINANCIAL ASSETS AND LIABILITIES OF NON-FINANCIAL CORPORATIONS(a) Consolidated values, EUR millions 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19295 As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.9 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16861 Securities other than shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 Investment fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 21905 25.4 18685 741 257 2222 26393 28.4 22385 903 410 2695 33930 33.6 27843 2074 1018 2995 36182 33.5 27379 5687 912 2204 34364 29.7 28959 2724 1954 727 39027 31.8 30755 5124 2309 840 46387 36.1 30479 6776 8172 961 49064 37.6 34764 5583 7642 1074 49070 36.3 35811 5685 6448 1126 Financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44425 As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55.0 Securities other than shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6134 47680 55.3 7255 53403 57.4 7913 65903 65.3 9526 77419 71.7 11541 93756 81.1 12593 112730 92.0 14883 120838 94.1 17921 102917 126254 96.7 16296 109958 128586 95.1 17865 110721 38291 40426 45490 56377 65878 81163 97847 51.8 55.3 57.4 65.3 71.8 81.4 89.4 91.6 94.2 95.0 59.8 63.6 66.0 73.9 80.6 89.5 96.9 98.1 100.6 101.6 -25130 -25775 -27010 -31973 -41237 -59392 -73702 -74451 -77191 -79516 -31.1 -29.9 -29.0 -31.7 -38.2 -51.4 -60.1 -58.0 -59.1 -58.8 Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Memo: As a percentage of GDP Financial liabilities excluding loans from enterprises of direct investment. . . . . . . . . . . . . . . Financial liabilities excluding loans from enterprises of direct investment and including trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Source: INE and Banco de Portugal. Note: (a) Includes interest-bearing financial instruments only. Banco de Portugal | Annual Report | 2004 184 Supplementary tables Table A.7.16 GENERAL GOVERNMENT FINANCIAL TRANSACTIONS Consolidated values, EUR millions 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Net acquisition of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities other than shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity excluding investment funds. . . . . . . . . . . . . . . . . . . Investment fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Life insurance and pension funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions excluding trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1282 1.6 1794 -16 96 -420 -427 7 1 0 1 -173 0 -173 -860 -1.0 -218 144 90 -1683 -1677 -6 1 0 1 805 0 805 -2640 -2.8 368 -108 97 -3680 -3687 7 2 0 2 681 0 681 -1612 -1.6 718 142 193 -2429 -2434 5 1 0 1 -237 0 -237 -309 -0.3 688 47 129 -1042 -1115 74 1 0 1 -133 0 -133 -1070 -0.9 -680 81 162 -1031 -1053 23 1 0 1 396 1 395 1329 1.1 -1792 60 153 -81 -100 19 1 0 1 2988 0 2988 2588 2.0 1573 -46 281 616 649 -33 0 0 0 162 -1 163 249 0.2 -1255 178 387 727 678 49 0 0 0 212 -1 213 876 0.6 -226 -104 110 -376 -504 128 -0 0 -0 1473 0 1473 Net incurrence of liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities other than shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity excluding investment funds. . . . . . . . . . . . . . . . . . . Investment fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Life insurance and pension funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions excluding trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5704 7.1 1317 4038 545 0 0 0 0 0 0 -196 0 -196 3255 3.8 1179 2700 -581 0 0 0 0 0 0 -43 23 -66 685 0.7 630 528 -715 0 0 0 0 0 0 242 -13 254 1589 1.6 252 626 154 0 0 0 0 0 0 557 8 550 2790 2.6 538 1957 283 0 0 0 0 0 0 12 -1 13 2278 2.0 1136 1604 -72 0 0 0 0 0 0 -391 -25 -366 6737 5.5 1137 5283 765 0 0 0 0 0 0 -447 -3 -445 6102 4.8 1049 5454 562 0 0 0 0 0 0 -963 -14 -949 4118 3.2 695 3025 144 0 0 0 0 0 0 253 0 253 4862 3.6 -148 4422 1256 0 0 0 0 0 0 -668 0 -668 Financial saving (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4422 -5.5 -4115 -4.8 -3325 -3.6 -3201 -3.2 -3099 -2.9 -3348 -2.9 -5408 -4.4 -3514 -2.7 -3868 -3.0 -3985 -2.9 -6928 -5.3 -7037 -5.2 0 0 Financial saving - adjusted figures(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statistical discrepancy(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0 0 0 0 0 0 Sources: INE and Banco de Portugal. Notes: (a) The financial saving of a sector in a specific year is given by the difference between transactions in financial assets and financial liabilities occurred in that year, i.e. it is equal to net lending/borrowing that result from non-financial operations. In this sense, it is the difference between resources (income and transfers) and allocations (expenditure on goods and services and transfers). (b) The adjusted figures result from the correction, in 2003, of the effect of the sale of tax credits by general government, in 2003, and of transfers of pension funds from public undertakings to Caixa Geral de Aposentações, namely the transfer from the Post Office (€1300.0 million) in 2003 and the transfers from Navegação Aérea de Portugal (€ 235.7 million), Aeroportos de Portugal (€173.6 million) and Imprensa Nacional Casa da Moeda (€137.8 million) in 2004. (c) Statistical discrepancy is the difference between financial saving and net lending/borrowing (see note (a)). Banco de Portugal | Annual Report | 2004 185 Supplementary tables Table A.7.17 GENERAL GOVERNMENT DEBT BY INSTRUMENTS AND BY HOLDING SECTORS EUR millions 1995 Classification by instruments Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Savings certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of which: Treasury bonds - fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury bonds - indexed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medium- and long-term loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1996 1997 1998 1999 2000 2001 2002 2003 2004 6934 7583 7963 7995 8362 9282 10009 10650 10796 10805 6675 7128 3126 7340 7173 33572 7699 5547 36692 7681 1941 40917 8014 864 44678 8921 511 46966 9639 2226 50714 10171 286 57977 10293 4079 57258 10214 10797 54609 10931 3549 403 6236 51962 64.3 13786 5949 443 5488 54259 62.9 19009 6546 299 4463 54964 59.1 22449 6456 301 4333 55489 55.0 31672 4394 413 4340 58657 54.3 33677 3231 429 4377 61566 53.3 40142 2640 751 4767 68466 55.9 49604 1324 397 5831 75142 58.5 51115 337 554 5700 78387 60.0 51472 0 716 6651 83578 61.8 Memo: General government deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7334 7107 7476 8197 8894 8257 6445 8016 6658 6459 Classification by holding sectors Domestic sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Banco de Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other monetary financial institutions . . . . . . . . . . . . . . . . . . . . . . . . Non-monetary financial institutions. . . . . . . . . . . . . . . . . . . . . . . . . . Other residents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-residents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41181 1146 21514 8486 10035 10781 51962 40576 1058 21171 10672 7676 13683 54259 37184 878 16700 12587 7019 17780 54964 34493 204 12729 13353 8208 20996 55489 30840 414 8589 10715 11123 27817 58657 30217 17 8654 10107 11440 31350 61566 33409 25 9235 7025 17123 35057 68466 34900 32 8210 6045 20614 40241 75142 33302 27 8059 5955 19261 45084 78387 31675 31 8696 4576 18372 51903 83578 Sources: INE, Ministério das Finanças and Banco de Portugal. Banco de Portugal | Annual Report | 2004 186 Supplementary tables Table A.7.18 FINANCIAL TRANSACTIONS OF THE FINANCIAL SECTOR Consolidated values, EUR millions 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Net acquisition of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monetary gold and SDRs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities other than shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity excluding investment funds. . . . . . . . . . . . . . . . . Investment fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Life insurance and pension funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions excluding trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 18231 22.6 13 2883 2839 7193 3162 3162 0 37 0 37 2105 57 2048 17796 20.6 16 -1859 6861 10902 2302 1745 557 49 0 49 -474 -63 -410 23170 24.9 17 5525 1098 15208 2506 2435 71 129 0 129 -1312 28 -1340 28867 28.6 1017 -2023 2974 21939 1893 2051 -158 55 0 55 3011 8 3003 25586 23.7 -221 -1565 -2686 26325 3268 2671 597 13 0 13 451 90 361.7 42186 36.5 9 2175 1534 30750 4545 4549 -4 26 0 26 3146 -1 3147 28857 23.5 13 -927 3923 25030 1181 664 518 79 0 79 -441 32 -473 22453 17.5 -145 1440 4137 16244 873 626 246 -7 0 -7 -88 -53 -36 30227 23.1 -769 7651 8907 13592 1727 1820 -94 168 0 168 -1048 -4 -1044 22699 16.8 -584 729 5940 15138 1140 703 437 62 0 62 274 58 216 Net incurrence of liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities other than shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity excluding investment funds. . . . . . . . . . . . . . . . . Investment fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Life insurance and pension funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions excluding trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 18044 22.3 12961 127 134 1288 827 460 3213 2892 321 321 243 78 17875 20.7 10899 1268 305 2220 702 1518 3027 2688 340 155 143 12 22530 24.2 14025 -143 18 3047 -478 3525 3924 3296 629 1659 -136 1795 27942 27.7 17017 811 1307 4832 1846 2986 3693 3345 348 282 62 220 25078 23.2 15202 2386 2333 1563 1561 2 4172 3900 272 -577 59 -636 40760 35.3 26727 3924 2732 3238 3578 -338 3571 3044 527 568 -80 648 28884 23.6 15708 5487 2514 4007 2513 1494 4484 4085 399 -3316 160 -3476 23365 18.2 6562 791 6317 5881 4217 1665 5234 5025 209 -1419 382 -1802 29347 22.5 6587 1895 6490 10173 8002 2172 2211 2001 210 1992 -181 2172 24978 18.5 13566 645 -1269 8306 6897 1409 2533 2706 -173 1196 66 1130 Financial saving(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 0.2 -79 -0.1 640 0.7 924 0.9 507 0.5 1426 1.2 -27 0.0 -912 -0.7 880 0.7 -2280 -1.7 Financial saving - adjusted figures(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statistical discrepancy(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 0 -99.7 -175.6 -0.8 54.4 -177.6 361.6 50.6 -544.7 -0.6 -0.6 Sources: INE and Banco de Portugal. Notes: (a) The financial saving of a sector in a specific year is given by the difference between transactions in financial assets and financial liabilities occurred in that year, i.e. it is equal to net lending/borrowing that result from non-financial operations. In this sense it is the difference between resources (income and transfers) and allocations (service and good expenditures and transfers). (b) The adjusted figures result from the correction of the effect of transfer of assets from public undertakings to Caixa Geral de Aposentações, namely the pension fund of Caixa Geral de Depósitos (€2504.4 million). (c) Statistical discrepancy is the difference between financial saving and net lending/borrowing (see note (a)). Banco de Portugal | Annual Report | 2004 187 Supplementary tables Table A.7.19 FINANCIAL TRANSACTIONS OF THE SUB-SECTORS OF THE FINANCIAL SECTOR (to be continued) Consolidated values, EUR millions Central bank Net acquisition of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monetary gold and SDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monetary gold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SDRs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transferable deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities other than shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities other than shares and financial derivatives . . . . . . . . . . . . . Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medium and long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medium and long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity excluding investment funds . . . . . . . . . . . . . . Investment funds units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Life insurance and pension funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions excluding trade credit . . . . . . . . . . . . . . . . . . . . . . . . Banco de Portugal | Annual Report | 2004 OMFIs Insurance corporations and pensions funds OFIFA 2003 2004 2003 2004 2003 2004 2003 2004 322 0.2 -769 -775 7 820 -6 -406 1232 428 459 969 -510 -31 8 0 8 0 0 0 0 0 0 -165 -10 -155 -1171 -0.9 -584 -588 4 1298 4 71 1223 -1890 -1864 -2479 615 -26 2 0 2 4 4 0 0 0 0 0 0 0 24262 18.6 0 0 0 15328 249 6863 8217 4051 4020 669 3351 32 3488 -118 3606 1140 1476 -336 3 0 3 252 -9 261 11724 8.7 0 0 0 -5731 -194 -5570 33 5063 4932 1691 3242 130 9775 415 9360 1080 727 354 -3 0 -3 1539 0 1539 12754 9.8 0 0 0 725 0 1157 -432 1849 1904 606 1299 -55 10567 1163 9404 492 534 -42 1 0 1 -880 15 -894 8429 6.2 0 0 0 619 0 173 446 774 732 745 -14 42 6603 954 5649 576 412 163 0 0 0 -143 58 -200 3147 2.4 0 0 0 470 0 674 -205 1312 1312 60 1252 0 20 15 5 1702 1171 531 168 0 168 -524 0 -524 -98 -0.1 0 0 0 -15 0 -442 427 1694 1694 615 1079 0 -4 6 -10 -678 -902 223 62 0 62 -1158 0 -1158 188 Supplementary tables Table A.7.19 FINANCIAL TRANSACTIONS OF THE SUB-SECTORS OF THE FINANCIAL SECTOR (continued) Consolidated values; EUR millions Central bank OMFIs Insurance corporations and pension funds OFIFA 2003 2004 2003 2004 2003 2004 2003 2004 Net incurrence of liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monetary gold and SDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transferable deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities other than shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities other than shares and financial derivatives . . . . . . . . . . . . . Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medium and long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial derivates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medium and long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity excluding investment funds . . . . . . . . . . . . . . Investment fund units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Life insurance and pension funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions excluding trade credit . . . . . . . . . . . . . . . . . . . . . . . . 444 0.3 0 0 -24 31 2420 -2474 -976 -976 0 -976 0 1519 0 1519 0 0 0 0 0 0 -76 -2 -74 -1095 -0.8 0 0 1057 -371 1830 -402 -1054 -1054 0 -1054 0 -943 0 -943 0 0 0 0 0 0 -155 0 -155 23075 17.7 0 0 16303 0 3076 13227 -104 -92 477 -569 -12 5451 0 5451 1414 1029 385 50 50 0 -39 -90 51 12589 9.3 0 0 7951 0 -2692 10643 139 134 -551 685 5 -594 0 -594 1358 1357 1 2546 2546 0 1188 0 1188 13321 10.2 0 0 0 0 0 0 1633 1647 122 1525 -15 67 1404 -1337 10281 8248 2033 -80 -75 -5 1421 -38 1458 9437 7.0 0 0 0 0 0 0 1215 1212 242 969 3 1490 1221 269 6719 5008 1711 4 4 0 9 5 4 2764 2.1 0 0 0 0 0 0 76 0 0 0 76 -57 61 -117 84 84 0 2244 2027 218 416 -51 468 232 0.2 0 0 0 0 0 0 46 0 0 0 46 16 6 10 71 71 0 -19 156 -176 118 60 58 Financial saving(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -123 -0.1 -77 -0.1 1188 0.9 -865 -0.6 -568 -0.4 -1008 -0.7 384 0.3 -330 -0.2 Financial saving - adjusted figures(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1645 1.2 Sources: INE and Banco de Portugal. Notes: (a) The financial saving of a sector in a specific year is given by the difference between transactions in financial assets and financial liabilities occurred in that year, i.e. it is equal to net lending/borrowing that result from non-financial operations. In this sense, it is the difference between resources (income and transfers) and allocations (expenditure on goods and services and transfers). (b) The adjusted figures result from the correction of the effect of transfer of assets from public undertakings to Caixa Geral de Aposentações, namely the pension fund of Caixa Geral de Depósitos (€2504.4 million). Banco de Portugal | Annual Report | 2004 189 Supplementary tables Table A.7.20 FINANCIAL TRANSACTIONS OF THE EXTERNAL SECTOR Consolidated values, EUR millions 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Net acquisition of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monetary gold and SDRs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities other than shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity excluding investment funds. . . . . . . . . . . . . . . . . Investment fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Life insurance and pension funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions excluding trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 9257 11.5 -13 6604 1680 912 48 39 9 6 0 6 20 259 -239 10125 11.7 -16 5196 1715 83 2559 2586 -27 8 0 8 579 599 -20 19811 21.3 -17 9556 4897 1024 3695 3712 -16 15 0 15 640 555 85 19535 19.3 -1017 11376 2831 1834 3894 3895 -1 11 0 11 608 567 41 17407 16.1 221 4835 8766 1707 1146 1146 0 8 0 8 723 728 -4 36057 31.2 -9 21497 2448 3823 7243 7337 -94 17 0 17 1040 927 113 34589 28.2 -13 14033 8192 7664 4988 5038 -49 13 0 13 -289 -338 49 23014 17.9 145 5308 7228 6196 4916 4847 69 6 0 6 -786 -743 -43 33330 25.5 769 5520 4999 6749 15153 15091 62 8 0 8 134 25 109 23295 17.2 584 9934 5436 -2145 8645 8438 207 -7 0 -7 847 661 185 Net incurrence of liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency and deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities other than shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares and other equity excluding investment funds. . . . . . . . . . . . . . . . . Investment fund units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance technical reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Life insurance and pension funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other transactions excluding trade credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 9217 11.4 3010 1034 1295 492 469 23 37 0 37 3349 358 2991 9022 10.5 -1467 4398 2798 1245 523 722 49 0 49 2000 227 1773 17059 18.3 6087 5106 1740 2290 2171 119 129 0 129 1708 679 1028 15027 14.9 139 7245 3197 4050 4244 -194 55 0 55 341 96 245 10837 10.0 -2567 4829 1781 4769 4210 558 13 0 13 2012 330 1682 25922 22.4 6407 3803 4847 9118 9121 -3 26 0 26 1721 1027 694 23733 19.4 3421 7878 4834 7710 7002 708 79 0 79 -189 -360 171 15607 12.1 4089 7356 6004 -1148 -1531 384 -7 0 -7 -688 -303 -385 29048 22.2 9668 13468 -1537 7061 7111 -50 168 0 168 220 15 205 15283 11.3 2414 7545 -1455 5031 4505 526 62 0 62 1686 259 1427 Financial saving(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As a percentage of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 0.0 1103 1.3 2752 3.0 4508 4.5 6570 6.1 10136 8.8 10856 8.9 7407 5.8 4283 3.3 8012 5.9 Statistical discrepancy(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 -569 -117 -222 -245 -140 -371 -338 -48 54 Sources: INE and Banco de Portugal. Notes: (a) The external financial saving is given by the difference between net acquisition of financial assets (regarding residents) and net incurrence of liabilities of non-residents (regarding residents); it is equal to net lending/borrowing that results from non-financial operations (unless a statistical discrepancy); it is the symmetrical value of total net lending/borrowing of resident sectors. (b) Statistical discrepancy is the difference between financial saving and net lending/borrowing (see note (a)). Banco de Portugal | Annual Report | 2004 190 Part II. Report and Financial Statements Chapter 8. Activities of the Bank Chapter 9. Financial Statements Report and Financial Statements 8. ACTIVITIES OF THE BANK 8.1. Supervision of Credit Institutions and Financial Companies, the Guarantee of Deposits and the Mutual Agricultural Credit Guarantee Fund 8.1.1. Overview In 2004 prudential supervision and regulatory functions carried out by Banco de Portugal focused, as usual, on the following areas: • Preparation of and co-operation in draft regulations and legislation, primarily targeted at the reformulation of the legal framework governing the activity of credit institutions and financial companies, the improvement of supervisory instruments and methods, and the revision of the legal framework applicable to some financial techniques and products; • Continuous and systematic control of the activity, financial position, risks, and capital adequacy of the own funds of credit institutions and financial companies, both on an individual and on a consolidated basis; • Assessment and control, from a prudential perspective, of the restructuring operations of banking and financial groups and respective institutions, and analysis of the reorganisation and rationalisation programmes subsequent to such operations; • Monitoring of financial reorganisation and winding-up procedures of institutions subject to the supervision of Banco de Portugal; • Co-ordination of and co-operation with other supervisory authorities, both at national level – namely, participation in Conselho Nacional de Supervisores Financeiros (National Council of Financial Supervisors, Portuguese acronym CNSF) – and at international level, as well as participation in committees and working groups of the European Union, the European Central Bank, and of other international organisations. 8.1.2. Regulatory framework governing the activity of institutions and the supervisory functions In the course of 2004, Banco de Portugal issued a significant number of regulatory rules and Banco de Portugal | Annual Report | 2004 circular letters, with the aim of enhancing and strengthening the supervisory instruments, adapting them to the increasing complexity of both the risks and the financial activity of financial institutions and groups, as well as to the development of the best practice at international level. Among the rules and/or recommendations issued, mention should be made of the following: Notices: • Addendum of the Multilateral Investment Guarantee Agency to the list of multilateral development banks for the purpose of risk weighting in order to calculate the solvency risk (see Notice No. 2/2004 of 24 May, amending paragraph 5 of Part I of Notice No. 1/93 of 8 June, following the publication of the Commission Directive 2004/69/EC of 27 April); • Revision of the prudential regime of wealth management companies, setting the minimum ratio of the amount of these companies’ own funds to the overall amount of the portfolios managed by them, and establishing the valuation criteria of these portfolios (see Notice No. 3/2004 of 9 July, replacing Executive Order No. 422-C/88); • Extension into 2004 of the possibility of provisions for capital losses on financial holdings being registered against reserves (see Notice No. 4/2004 of 28 July, amending Notice No. 4/2002 and Circular Letter No. 73/2004/DSBDR of 13 August). Instructions: • Definition of obligations regarding the collection and/or reporting of information to Banco de Portugal, in compliance with the limitations applicable to credit granting provided for in Articles 85 (board members) and 109 (owners of qualifying holdings) of the Legal Framework of Credit Institutions and Financial Companies, approved by Decree-Law No. 298/ 92 of 31 December (see Instruction No. 2/2004 of 16 February); • Establishment of the rules governing the acquisition of transferable securities by mutual guarantee companies for their own portfolio (see Instruction No. 11/2004 of 17 May); 193 Report and Financial Statements • Reduction of the deadline for the deduction from own funds of the value (net of provisions) of real estate received in repayment of own credit, following the extension period granted under Article 114 of the Legal Framework of Credit Institutions and Financial Companies (see Instruction No. 14/2004 of 8 July, amending Instruction No. 120/96); • Definition of the data that must be reported to Banco de Portugal on assets portfolios managed by wealth management companies and by mutual fund management companies (see Instruction No. 17/2004 of 24 August, revoking Instruction No. 80/96); • Rewording of the notification and regular reporting of information on securitisation transactions (see Instruction No. 18/2004 of 24 August, revoking Instruction No. 29/2001); • Setting of an obligation for institutions to forthwith notify any situation deemed relevant in the performance of their activity, having an impact on their profitability and financial soundness (see Instruction No. 19/2004 of 24 August); • Definition of the information to be reported to Banco de Portugal when there is a change in the location of the head office of institutions subject to special registration (see Instruction No. 22/2004 of 15 December); • Definition of the procedures to be followed in the reporting of consolidated accounting data, prepared in accordance with the International Accounting Standards (see Instruction No. 23/2004 of 29 December). Circular Letters: • Clarification regarding the accounting of autonomous warrants, which are equivalent to derivative financial instruments and should be treated in the same way as option contracts (see Circular Letter No. 14/2004/DSBDR of 13 February); • Communication regarding the fact that Banco de Portugal does not object to institutions recognising in advance the dividend to be distributed by their subsidiaries during the fiscal year in which the profits are generated as revenue of the parent undertaking, provided that certain requirements are fulfilled, according to the 194 International Accounting Standard “IAS 18” (see Circular Letter No. 18/2004/DSBDR of 5 March); • Update, within the scope of the measures aimed at combating money laundering, of the list of the countries and territories considered as non-cooperative by the Financial Action Task Force (FATF), recommending increased vigilance by credit institutions and financial companies as regards operations contracted with residents in those countries or territories, and abolition of the application of additional counter-measures (see Circular Letters No. 25/2004/DSB of 24 March, No. 69/2004/DSB of 28 July and No. 101/2004/ DSB of 3 December); • Clarification on the deadlines for the revaluation of real estate acquired in repayment of own claims (see Circular Letter No. 38/2004/ DSB of 30 April); • Clarification on the provisioning system for credit default swaps (see Circular Letter No. 39/2004/DSB of 30 April, and Circular Letter No. 48/2004/DSB of 9 June); • Clarification on the reporting requirements for transactions with other entities of a financial group (see Circular Letter No. 89/2004/DSB of 15 October); • Definition of the accounting model to be adopted by institutions subject to the supervision of Banco de Portugal that are not covered by Article 4 of Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July, allowing them to implement a transitional regime during the year starting on 1 January 2005 (see Circular Letter No. 102/2004/DSB of 23 December). Measures were also adopted particularly aimed at increasing transparency and protecting the consumers, namely: • Adoption of a minimum set of indicators whenever credit institutions publish quantitative information on the solvency, credit quality, profitability and efficiency, in order to guarantee the consistency of information disclosed to the public (see Instruction No. 16/2004 of 16 August); • Clarification on the delimitation of activities allowed to credit institutions and financial companies within the scope of the trading of Banco de Portugal | Annual Report | 2004 Report and Financial Statements non-financial products, describing the type of information to be disclosed to the public (see Circular Letter No. 68/2004/DSBDR of 26 July); • Clarification on the pre-contractual information to be provided by credit institutions on loan applications submitted by suppliers of goods and services subscribed by their customers (see Circular Letter No. 72/2004/ DSBDR of 6 August). Banco de Portugal participated in the preparation of Decree-Law No. 88/2004 of 20 April – which transposes into Portuguese law Directive 2001/65/EC of 27 September – on the valuation rules applicable to consolidated and individual accounts of certain types of companies as well as of banks and other financial institutions. Mention should also be made of the participation of Banco de Portugal in the preparation of Decree-Law No. 35/2005,1 which transposes Directive 2003/51/EC of the European Parliament and of the Council of 18 June 2003, amending Directives 78/660/ EEC, 83/349/EEC and 91/674/EEC of the Council on the annual and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings and that establishes the scope of application of the International Accounting Standards, according to Regulation (EC) No. 1606/2002 of the European Parliament and of the Council. In the course of 2004, the Bank also participated in the works leading to the transposition into Portuguese law of the following European Community Directives: Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (amending Council Directives 85/611/EC and 93/6/EC and Directive 2000/12/EC of the European 1 Decree-Law approved by Portugal’s Council of Ministers on 23 December 2004 and published in the Official Gazette No. 34, Series I - A of 17 February 2005. Banco de Portugal | Annual Report | 2004 Parliament and of the Council); Directive 2002/ 65/EC of the European Parliament and of the Council of 23 September 2002, concerning the distance marketing of consumer financial services; Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate (see the reference to the activities of the National Council of Financial Supervisors in section 8.1.6). The Bank participated in the preparation of a draft law for legislative authorisation concerning the draft decree-law amending the Legal Framework of Mutual Agricultural Credit and Mutual Agricultural Credit Banks as well as in a Working Group set up by the Secretariat of State for Treasury and Finance, with the purpose of analysing the preliminary draft decree-law revising the legal framework applicable to mortgage bonds. 8.1.3. Supervisory activities 8.1.3.1. Developments in the universe of institutions In 2004 the trend decline already observed in previous years in the number of credit institutions and financial companies was confirmed (375 on 31 December 2004 down from 390 on 31 December 2003). This decline was the result of 29 registration cancellations, only partially offset by the registration of 14 new institutions (see Tables I, II and III). This reduction was observed in credit institutions (eight institutions less) and financial companies (seven companies less). As regards credit institutions, the decline still reflects the implementation of Decree-Law No. 186/2002 of 21 August, which created a new type of credit institution – the so-called "credit financial institutions" (instituições financeiras de crédito) – whose purpose is the carrying out of operations authorised to banks, except for the taking of deposits. In this context, banking groups proceeded with the rationalisation of their human and material resources, concentrating on this 195 Report and Financial Statements new type of institution the activities that were formerly carried on by specialised credit institutions. A more detailed analysis shows that there were nine new registrations of credit institutions – seven credit financial institutions and two branches of credit institutions having their head office in the EU. With respect to the seven new credit financial institutions, five resulted from the transformation of specialised credit institutions, one resulted from the transformation of a company previously not subject to registration with Banco de Portugal and only one corresponded to the setting-up of a new institution. By contrast, the registration of seventeen institutions was cancelled: a branch of a foreign credit institution, two banks (due to merger with other banks) and fourteen specialised credit institutions (six financial leasing companies, six credit purchase financing companies and two factoring companies). Among these cancellations, five correspond to institutions that were transformed into credit financial institutions and the others are related to incorporations into other institutions in the context of the reorganisation of banking groups. The number of financial companies declined by seven, in net terms, as a result of the registration of five new financial companies and the cancellation of twelve. The volume of cancellations was due to the winding up of four group purchase management companies and the continuation of the restructuring process of banking groups, to which contributed the publication of Decree-Law No. 252/2003 of 17 October. This Decree-Law, which approved the new legal framework of collective investment undertakings, allowed for the widening of the business purpose of securities investment fund management companies, i.e. these companies may be also authorised to carry out discretionary and individual portfolio management on behalf of third parties and to provide investment consultancy services and to manage property investment funds. This new scenario led to the transformation of those management companies into more versatile asset management companies, allowing for the introduction of changes in the organisational structure of national 196 financial groups. Within this scope, in 2004 the activity of three investment fund management companies was cancelled (one due to windingup and two due to incorporation into other management companies) as well as of three wealth management companies (one ceased its activity and two were incorporated into one bank and one investment fund management company). The cancellation of the registration of the remaining two financial companies involved one broker and one exchange office. With regard to new registrations of financial companies, two exchange offices, one investment fund management company, one wealth management company and one credit securitisation fund management company were set up. In 2004 there was also an increase in the number of representative offices of credit institutions and financial companies having their head office abroad (one more, in net terms). By contrast, the number of holding companies declined by eight, due to the winding up of one company and to the fact that seven ceased to be covered by the provisions laid down in Article 117 of the Legal Framework of Credit Institutions and Financial Companies. Finally, there were 28 new registrations of credit institutions having their head office in the European Economic Area and providing crossborder services in Portugal, which largely offset the six cancelled registrations. By geographical origin, 21 new registrations are related to credit institutions from Germany, Austria, Ireland and the United Kingdom. 8.1.3.2. Monitoring of institutions and financial groups In 2004, as in previous years, the monitoring and systematic assessment of the situation and evolution of credit institutions and financial companies, as well as of the financial groups in which they are included, were carried out by supervisory units responsible for one or more groups or institutions, based either on monthly, quarterly or half-yearly information elements (accounting and prudential reports on an individual and/or consolidated basis), or on data obtained during inspections, during other on- Banco de Portugal | Annual Report | 2004 Report and Financial Statements site activities or on a case-by-case basis, as well as on data produced by rating agencies and analysts. With regard to the information reported to Banco de Portugal, stress should be laid on the analysis of the level and structure of own funds, as well as of their adequacy to capital requirements for counterparty risk, exchange rate risk and other risks. The analysis also focused on the exposure to large risks, the quality of credit and other assets and the respective provisioning levels, the compliance with other prudential ratios and limits, the financial statements – balance sheet and profit and loss account – and the profitability, productivity and liquidity indicators. Economic provisions of institutions were also examined, as well as securitisation operations, in particular synthetic securitisation transactions and their prudential impact. Reference should also be made to the monitoring of the capital adequacy of financial conglomerates and of the respective shareholding structure, jointly with Instituto de Seguros de Portugal (Portuguese Insurance Institute) and within the framework of CNSF. The analysis of the internal control annual reports also enabled a more qualitative assessment, in particular with regard to risk management policies and to the control procedures in force. Within the scope of the activity plan for 2004, 31 inspections were carried out, covering the most relevant institutions in terms of size, ranking in the financial system, complexity of the operations carried out or specific problems. Among the inspections conducted in the course of the year, 15 were made to banks, 9 to other types of credit institutions (mutual agricultural credit banks, savings banks, credit financial institutions, financial leasing companies, factoring companies and credit purchase financing companies), 6 to financial companies (brokers, dealers and wealth management companies) and one to holding companies. In addition to inspections of a general nature (10), other inspections were also carried out focusing on specific aspects, such as: assessment of credit portfolios – in particular negotiated and restructured credit or housing credit – and securities portfolios; adequacy of the provisioning Banco de Portugal | Annual Report | 2004 and risk management policy, namely the liquidity risk and country-risk; adequacy of the internal control procedures; compliance with prudential limits; financial instruments operations and off-balance-sheet accounts; accounting procedures and reliability of reports. As usual, the inspections’ included contacts with the institutions’ management, namely through meetings held at the beginning of the process to communicate the objectives of the on-site examinations to be undertaken, and at the end, to analyse the preliminary conclusions. The final report, summarising the main conclusions of the inspection, is sent to the institutions for comments and adoption of possible corrective measures, whose implementation is subsequently monitored. Meetings were also held, as usual, with the major banking groups for the assessment of their overall situation and analysis of future development prospects. Moreover, regular contact was established with the institutions’ auditing boards and external auditors. 8.1.4. Consultancy, research and information management activities Among the consultancy, research and information management activities developed in the course of 2004 two components should be highlighted: i) Regular activities, covering, in particular, the following areas: • Setting-up of credit institutions and financial companies, acquisition, merger, splitting, winding-up or liquidation of institutions or restructuring of financial groups, and acquisition or disposal of qualifying holdings; • Carrying on of activities in Portugal by institutions having their head office abroad, and abroad by national credit institutions (opening up of branches and representative offices and international provision of services); • Regulatory own funds and prudential ratios or limits; • Amendments to articles of association (e.g. changes in the business name, structure of the management and auditing boards, reduction in equity capital); 197 Report and Financial Statements • Assessment of the suitability of the members of the corporate bodies of the institutions subject to supervision, as well as of the possible accumulation of posts, and prevention of conflicts of interest; • Definition of the scope of the activity authorised to institutions subject to supervision, in particular with regard to the launching of new products or financial services; • Monitoring of developments in national financial conglomerates and respective capitalisation levels; • Regular monitoring of liquidity risk (both on an individual and on a consolidated basis); • Quarterly assessment of the overall situation of the Portuguese banking system and of the main financial groups, with particular emphasis on credit growth and respective financing, and quarterly analysis of the banking system’s profitability; • Regular analysis of the exposure of the banking system to specific geographical areas (counterparty risk); • Revision of the composition of risk classes, for the purpose of setting up country-risk provisions; • Issue of opinions for the Ministry of Finance and the Ministry of Justice, namely on the activity of international organisations and on draft legislation, such as: preliminary draft law with a view to the transposition into national law of Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading ("Prospectus Directive"); legislative proposal for the strengthening of auditor independence; new legal framework of real estate funds. Participation in joint working groups on specific issues, such as the "capital market revitalisation project"; • Exchange of information and replies to consultations from other national and international supervisory authorities and co-operation with public authorities; ii) Activities related to the introduction of regulations of a prudential or accounting nature, of which the following should be highlighted: 198 • International Accounting Standards (IAS) – Assessment and preparation of the proposal on the application of IAS (enforcement of Regulation No 1606/2002) for institutions subject to the supervision of Banco de Portugal; preparation of the corresponding accounting data reporting forms; preparation of regulatory instruments, of an accounting nature, governing the so-called "adjusted accounting standards"; revision of prudential regulations (own funds, solvency ratio, provisions) given the need to implement "prudential filters", as a result of the adoption of "adjusted accounting standards" and "international accounting standards". Some of these issues were analysed by a working group formed by Banco de Portugal and banks belonging to the Board of Associação Portuguesa de Bancos (Portuguese Banking Association); • New Basel Capital Accord – Study on the implementation of a (qualitative and/or quantitative) prudential regime on the interest rate risk of the banking portfolio; definition of the activity planning regarding the New Basel Capital Accord on the approval and validation of internal models; organisation of a series of conferences on the new Capital Accord, where the following issues were discussed: i) the Basel Capital Accord in the context of the stability of the financial system; ii) own funds requirements for the coverage of credit risk: standard methods and IRB approaches; iii) credit risk mitigation techniques; iv) credit risk: securitisation; v) own funds requirements for the coverage of operational risk; vi) supervision process (pillar 2) and market discipline (pillar 3); • Securitisation – Analysis of securitisation operations and their prudential and accounting framework; definition of understandings, namely the accounting of residual certificates and provisioning, accounting of commissions on securitised credits; analysis of the prudential processing of "implied support" to securitisation operations and preparation of a draft instruction on implied support and significant involvement in securitisation operations; • Accounting and prudential implications of operations involving credit risk transfer instruments; Banco de Portugal | Annual Report | 2004 Report and Financial Statements • Impact study on changes to the limits on large exposures of mutual agricultural credit banks/Integrated System of Mutual Agricultural Credit; • New observation exercise of the capitalisation levels of national financial conglomerates jointly with Instituto de Seguros de Portugal (Portuguese Insurance Institute) and with Comissão do Mercado de Valores Mobiliários – CMVM (Securities Market Commission), within the scope of CNSF activity. With respect to the information systems, the following should be highlighted: • BPnet system – Provision of access to the accounting data reception service through the BPnet portal; • Update and creation of data collection applications as regards the regulatory rules issued; • Analysis of the information provided by the main rating agencies. Proceedings settled 8.1.5. Claims and breaches of regulations In 2004, 1,298 claims were submitted to Banco de Portugal by the institutions supervised or by their customers and 1,277 proceedings were concluded. These claims arose in particular from alleged irregularities in the operation of bank accounts and banking costs, housing loans, consumer credit, cheques, bank guarantees and transfers, non-authorised activity, interest rates, transferable securities, rules of conduct and bank secrecy. 15 breach-of-regulations proceedings were initiated, in response to situations in which recourse to the preventive measures and instruments at the disposal of Banco de Portugal proved insufficient or inadequate. These were related, in particular, to the carrying on of non-authorised activity, non-compliance with registration requirements of members of the corporate bodies, non-compliance with accounting data requirements and reporting requirements to Banco de Portugal, damaging management stemming from credit operations and beginning of activity prior to registration. The following table features relevant data for 2004 with regard to proceedings settled: Defendants penalised 13 individuals 12 Appeals 10 1 credit institution - 3 financial companies - 2 holding companies - Infractions Violation of the reporting requirements regarding the sale/purchase of quality holdings Omission of information that should be provided to Banco de Portugal within specific period of time Provision of false information to Banco de Portugal Illegal performance of management functions Granting of credit to board members Non-authorised opening up of delegations Non-compliance with prudential rules - large exposures, own funds Failure to communicate the accumulation of posts to Banco de Portugal Banco de Portugal | Annual Report | 2004 199 Report and Financial Statements 8.1.6. Co-operation with other supervisory authorities and international activity Within the scope of the co-operation between national supervisory authorities, stress should be laid on the activities developed in 2004 by the National Council of Financial Supervisors (CNSF), which is composed of Banco de Portugal, Comissão do Mercado de Valores Mobiliários and Instituto de Seguros de Portugal. In accordance with the responsibilities entrusted to CNSF, several issues of common interest for supervisory authorities have been discussed, viz.: i) supervision of financial conglomerates – evaluation exercises of capitalisation levels and co-ordination of the transposition of the respective European Community Directive; ii) standardisation of accounting data – analysis of developments at Community and international level, in particular the impact of the adoption of the International Accounting Standards; iii) analysis of the treatment in Portuguese legislation of external auditors and preparation of draft legislation on the provision of auditing services to financial sector entities; iv) money laundering prevention – assessment of the degree of compliance with Recommendations of the Financial Action Task Force (FATF); v) monitoring of draft European Community Directives of a horizontal nature and/ or of their transposition – in particular the Directive concerning the distance marketing of consumer financial services; proposal for a Directive of the European Parliament and of the Council concerning the statutory audit of annual accounts, both individual and consolidated, and amending Council Directives 78/660/EEC and 83/349/EEC and proposal for a Directive on unfair commercial practices; vi) preparation of the IMF’s Financial Sector Assessment Program (FSAP) – co-ordination of work between authorities and proposals for action. As regards some of these issues, working groups have been set up to further develop certain aspects and put forward proposals to be submitted for the appraisal of CNSF. At international level, the regular co-operation and exchange of information were further pursued with banking supervisory authorities of other EU Member States, as well as of non-EU countries. Reference should also be made to the monitoring of legislative and regulatory developments, in particular at European level, including the participation in several committees and working 200 groups, with emphasis on the creation in 2004 of the Committee of European Banking Supervisors (CEBS) and its subgroups. Among the different subjects dealt with, reference should be made, on the one hand, to those leading to the harmonisation of prudential regulations – inter alia, revision of the capital adequacy regime, implementation of international accounting standards, supplementary supervision of financial conglomerates – and, on the other hand, to those with particular interest to supervisory authorities, such as the macroprudential analysis, structural developments of the European banking systems and financial stability, convergence of supervisory practices, strengthening of the co-operation between authorities regarding the management of crises. Stress should also be laid on the participation in the revision of the European Community Directive on the prevention of the use of the financial system for the purpose of money laundering, including terrorist financing, which aims at incorporating FATF’s Recommendations. 8.1.7. Deposit Guarantee Fund At the end of 2004, 50 credit institutions authorised to take deposits participated in the Deposit Guarantee Fund, namely 40 banks, 5 savings banks and 5 mutual agricultural credit banks. Compared with 31 December 2003, there was a reduction of 6 banks participating in the Fund, due to the merger by incorporation of 7 banks into other credit institutions and to the establishment of a new bank, which resulted from the merger of three banks. In 2004 annual contributions of member credit institutions to the Fund amounted to €53 million, €24 million of which were settled in cash, €3 million in certificates of deposit issued by Banco de Portugal and €26 million were settled by recourse to irrevocable payment commitments, collateralised by eligible securities. On 31 December 2004 the financial resources of the Fund amounted to €1,120 million, reflecting a year-on-year growth of €73 million. On the same date, the volume of deposits covered by the guarantee system reached approximately €115 billion. The net result for the year 2004 amounted to €20 million, mainly accounted for by the yield on investments made by the Fund in public debt Banco de Portugal | Annual Report | 2004 Report and Financial Statements securities and, to a lesser extent, in certificates of deposit issued by Banco de Portugal and gains from the sale of securities. The base contribution rate for 2004 was set at 0.05 per cent, while the weighted effective contribution rate2 of each credit institution, calculated according to the respective capital adequacy ratio, ranged between 0.02 and 0.03 per cent of the annual average balance of the deposits corresponding to the reserve base. The limit on irrevocable payment commitments that could be used for the partial replacement of the annual contribution was set at 50 per cent. With regard to regulations, Banco de Portugal issued Notice No. 5/2004, published in the Official Gazette, Series I-B of 7 October, which set at 0.0375 per cent the base contribution rate for 2005, and Notice No. 6/2004, published in the Official Gazette, Series I-B of 30 December, which amended Notice of the Banco de Portugal No. 11/94, as regards the eligibility of issuers of securities that can be pledged as guarantee for irrevocable payment commitments assumed by credit institutions. For the same year, Instruction No. 21/2004, published in the Official Bulletin of Banco de Portugal of 15 October 2004, set at 33 per cent the limit of the irrevocable payment commitments. 8.1.8. Mutual Agricultural Credit Guarantee Fund The Mutual Agricultural Credit Guarantee Fund (Fundo de Garantia do Crédito Agrícola Mútuo – FGCAM) was established by Decree-Law No. 182/87 of 21 April and its Legal Framework was amended by Decree-Law No. 345/98 of 9 November. Its main task consists in guaranteeing the repayment of deposits opened with the central mutual agricultural credit bank (Caixa Central de Crédito Agrícola Mútuo) and with mutual agricultural credit banks participating in the Integrated System of Mutual Agricultural Credit (Sistema Integrado do Crédito Agrícola Mútuo – SICAM). These banks pay FGCAM an annual contribution according to Notice No. 14/2003 of the Banco de Portugal, fostering and undertaking any action deemed necessary to ensure the 2 Settled in cash and equivalent instruments. Banco de Portugal | Annual Report | 2004 solvency and liquidity of participating banks. FGCAM is housed in the premises of Banco de Portugal, which gives technical and administrative support, and is managed by a Management Committee, comprising a chairman, who is a member of the Board of Directors of Banco de Portugal, and two members, one appointed by the Ministry of Finance and the other appointed by Caixa Central. On 31 December 2004, 120 mutual agricultural credit institutions participated in FGCAM. These institutions contributed with €13.5 million to the Fund in 2004. On 31 December 2004, FGCAM’s own funds amounted to €196.7 million, i.e. an increase of €13.7 million comparing with December 2003, while its financial resources totalled €66.2 million, reflecting a year-on-year growth of €17 million. Investments for the guarantee of deposits taken by banks participating in SICAM (in accordance with and for the purposes of article 11 of Decree-Law No. 345/98) stood at €36 million, €1.5 million more than at the end of 2003, and accounted for 18 per cent of FGCAM’s gross assets. The balance of free investments, which can be used in the financial aid to SICAM, stood at €30.2 million at the end of the year. The volume of deposits covered by the guarantee system is estimated to stand at around €7,173 million on 31 December 2004. Within the framework of its business purpose, FGCAM has granted subsidies and loans to both Caixa Central and mutual agricultural credit banks. In previous years, credit and equity instruments were purchased to the amount of €91 million, through Credivalor – Sociedade Parabancária de Valorização de Créditos, S.A., in which FGCAM holds 92 per cent of the capital. In 2004 FGCAM continued to monitor and financially aid SICAM, following the policy of previous years. On 31 December the assistance contracts in force involved loans granted by FGCAM to the amount of €130 million, €2 million of which were granted in 2004; in 2004 the Fund also approved financial aid operations to the overall amount of €28.5 million, whose implementation will follow the merger of the mutual agricultural credit banks involved. To date, the loans granted by FGCAM to SICAM totalled €184 million; in turn, the loans repaid by 16 mutual agricultural credit banks totalled €54 million. 201 Report and Financial Statements Table I INSTITUTIONS REGISTERED AS AT 31/12/2004 Number of institutions 2004 2003 68 68 Credit institutions Banks and branches of foreign banks Savings banks(1) Central and Mutual agricultural credit banks(2) Credit financial institutions 8 8 128 128 10 3 Investment companies(3) 3 3 Financial leasing companies 6 12 Factoring companies 4 6 Credit purchase financing companies 4 10 Mutual guarantee companies Branches of other foreign credit institutions Sub-total 3 3 12 13 246 254 Financial companies Dealers Brokers(4) Foreign-exchange or money-market mediating companies Investment fund management companies(5) Credit card issuing or management companies 7 7 10 11 1 1 45 47 3 3 Wealth management companies(6) 22 24 Group purchase management companies(7) 13 17 Exchange offices 22 21 Credit securitisation fund management companies 4 3 Other companies 2 2 129 136 financial companies having their head office abroad 28 27 Holding companies 52 60 455 477 340 318 Sub-total Representative offices of credit institutions and Total Credit institutions having their head office in an EEA(*), country and providing cross-border services (1) Of which, on 31 December 2004, three had undergone winding-up procedures. (2) Of which, on 31 December 2004, three had undergone winding-up procedures. (3) Of which, on 31 December 2004, one had undergone winding-up procedures. (4) Of which, on 31 December 2004, two had undergone winding-up procedures. (5) Of which, on 31 December 2004, one had undergone winding-up procedures. (6) Of which, on 31 December 2004, two had undergone winding-up procedures. (7) Of which, on 31 December 2004, seven had undergone winding-up procedures. (*) European Economic Area 202 Banco de Portugal | Annual Report | 2004 Report and Financial Statements Table II REGISTRATIONS (NEW INSTITUTIONS) Number of institutions 2004 2003 Banks and branches of foreign banks(1) 2 7 Savings banks - - Central and Mutual agricultural credit banks - - Credit financial institutions(2) 7 3 Credit institutions Investiment companies - - Financial leasing companies - - Factoring companies - - Credit purchase financing companies - - Mutual guarantee companies - 1 Branches of other foreign credit institutions - - 9 11 Sub-total Financial companies Dealers - - Brokers - 1 Foreign-exchange of money-market mediating companies - - Investiment fund management companies 1 - Credit card issuing or management companies - - Wealth management companies 1 2 Group purchase management companies - - Exchange offices 2 1 Credit securitisation fund management companies 1 1 Other companies - - 5 5 financial companies having their head office abroad 2 2 Holding companies - 5 16 23 28 27 Sub-total Representative offices of credit institutions and Total Credit institutions having their head office in an EEA(*) country and providing cross-border services (1) Two branches of credit institutions having their head office in the EU. (2) Of which, three resultedfrom the transformation of credit purchase financing companies, two resulted from the transformation of financial leasing companies and one resulted from the transformation of one company not subject to special registration. (*) European Economic Area. Banco de Portugal | Annual Report | 2004 203 Report and Financial Statements Table III CLOSING DOWN OF INSTITUTIONS Number of institutions 2004 2003 Banks and branches of foreign banks(1) 2 3 Savings banks - - Central and Mutual agricultural credit banks - 7 Credit financial institutions - - Investiment companies - 1 Financial leasing companies(2) 6 4 Factoring companies(3) 2 3 Credit purchase financing companies(4) 6 4 Mutual guarantee companies - - Branches of other foreign credit institutions 1 1 17 23 Credit institutions Sub-total Financial companies Dealers - 1 Brokers(5) 1 6 Foreign-exchange of money-market mediating companies - - Investiment fund management companies(6) 3 - Credit card issuing or management companies - - Wealth management companies(7) 3 4 Group purchase management companies(8) 4 1 Exchange offices(8) 1 - Credit securitisation fund management companies - - Other companies - - 12 12 financial companies having their head office abroad 1 4 Holding companies(9) 8 11 38 50 6 9 Sub-total Representative offices of credit institutions and Total Credit institutions having their head office in an EEA(*) country and providing cross-border services (1) Due to merger by incorporation of two Portuguese banks into two other Portuguese banks. (2) Two due to transformation into credit financial institutions and the others due to merger by incorporation, namely one into a credit purchase financing company, one into a company not subject to special registration, one into a financial leasing company and one into a bank. (3) Both due to merger by incorporation, namely one into a financial leasing company and the other into a company not subject to special registration. (4) Three due to transformation into credit financial institutions and the others due to merger by incorporation, namely into a financial leasing company, one into a credit financial institution and one into a company not subject to special registration. (5) Due to end of activity (6) One due to winding up and the others due to merger by incorporation into other investment fund management companies. (7) One due to end of activity and the others due to merger by incorporation, namely one into a bank and the other into an investment fund management company. (8) Due to winding up. (9) One due to winding up and the others because they ceased to be covered by Article 117 of the Legal Framework of Credit Institutions and Financial Companies. (*) European Economic Area. 204 Banco de Portugal | Annual Report | 2004 Report and Financial Statements 8.2. Currency issuance 8.2.1. Banknote issuance The value of banknotes issued by the Banco de Portugal amounted to €9,224 million3 at end2004, increasing by 2.5 per cent, up from its value at end-2003, which corresponds in absolute terms to an increase of €222 million. DEVELOPMENTS IN ISSUANCE – 2003/2004 U: 106 EUR Denomination (€) 500 Δ 2003-2004 Issuance value 31.12.2003 125 31.12.2004 abs % 142 16 13.1 200 77 55 -22 -28.1 100 848 664 -184 -21.7 50 3,052 2,893 -159 -5.2 20 3,362 3,815 453 13.5 10 1,030 1,077 47 4.5 5 509 579 70 13.8 Total 9 002 9 224 222 2.5 Developments in issuance by denomination were heterogeneous, with significant changes vis à vis the issuance aggregate: increases of around 13 per cent for €500, €20 and €5 banknotes and decreases of around 28 and 22 per cent for €200 and €100 banknotes respectively. The final issuance value corresponded to €5,002 million in banknotes in circulation and €4,222 million in banknotes issued held by the Banco de Portugal (in inventories). As at the end of the year in accounting terms the Banco de Portugal’s balance sheet item "banknotes in circulation" recorded a value of €11,386 million,4 translating the theoretical share of euro banknotes in circulation allocated to Portugal in total euro banknotes in circulation in 3 4 The concept of banknotes issued (which translates the currency issuance aggregate) is given by total banknotes destroyed deducted from total banknotes issued by the Banco de Portugal since the introduction of the euro. This value reflects an increase of 19 per cent against the balance sheet value of 2003, which stood at €9,530 million. The annual growth in the circulation in the Eurosystem, in value, amounted to 14.9 per cent. Banco de Portugal | Annual Report | 2004 the Eurosystem. Indeed, the total value of liabilities on account of euro banknotes in circulation in the Eurosystem is allocated in accordance with the banknote allocation key, which takes into account the European Central Bank’s 8 per cent share in the total euro banknote issuance and the allocation of the remaining 92 per cent to the various national central banks, according to the "key for subscription to the European Central Bank’s capital". The usage of this criterion for the estimation of the actual value of banknotes put into circulation in the Eurosystem countries aims to counter the effects of banknote migration. The circulation of a single currency in a common economic area, such as the euro in relation to the Eurosystem, necessarily implies considerable and unrestricted cash mobility across the euro area – which is, as a matter of fact, one of the main purposes of the Monetary Union. Therefore, banknote migration between the Eurosystem countries, stemming mainly from tourism and trade, makes it impossible for central banks to determine the real circulation in their geographical areas based only on the volume of banknotes issued and withdrawn from circulation, in contrast with the procedure for national currencies. However, by means of a migration ratio at the Eurosystem level, it is possible to estimate trends in banknote migration at the national level: MIGRATION RATIO* Denomination (€) 2004 500 200 100 50 20 10 5 1.22 2.90 1.96 1.23 0.93 0.98 0.98 Total 1.00 PT Deposits / PT Withdrawals *MR = Eurosistem Deposits / Eurosistem Withdrawals MR <1 —> Exports, MR >1 —> Imports 205 Report and Financial Statements For 2004 the four highest denominations show migration ratios considerably above the unit, which leads to the conclusion that a large amount of high denomination banknotes issued by other euro area central banks circulated in Portugal. Despite the fact that data on banknotes put into circulation by each central bank are no longer a reliable measure for estimating the quantity and the value of banknotes circulating in the country,5 the analysis of this aggregate should still be taken into account as it allows the identification of national behaviours and trends in the use of cash as a payment instrument. At the end of 2004 the value of banknotes put into circulation by the Banco de Portugal6 stood at €5,002 million, corresponding to a negative change of around 7 per cent vis à vis € 5,372 million reached at the end of 2003. It should also be mentioned that throughout 2004 the value of euro banknotes put into circulation by the Banco de Portugal stood permanently below the final value of circulation of escudo banknotes (as at 31 December 2001). However, for the above reasons, it is not possible to conclude that the real value of euro banknotes in circulation in Portugal in 2004 stood below the value of banknotes in circulation determined at end-2001. As shown in the table below, the three lowest denominations (€5, €10 and €20) as a whole account for the bulk of banknotes put into circulation by the Banco de Portugal (around 81 per cent in value and 94 per cent in quantity) and the highest denominations account for a small share, especially in quantity. This can be explained, on the one hand, by the economic reality of the country and, on the other hand, by the habit acquired over the past few years of paying in cash, which is naturally connected to the prevailing price system. The €20 banknote is clearly the most used banknote and the standarddenomination of the cash payment system in Portugal. At the end of the year, as in 2003, the €200 denomination recorded a negative circulation value (-0.50 million banknotes), in line with its migration ratio, the highest of all, which means that this denomination is likely to have recorded the highest content of banknotes issued in other countries. A similar trend was also observed, albeit to a lesser extent, in the values of €100 and €50 banknotes put into circulation, which decreased from 2003 to 2004. 5 Which results from considering, for that purpose, only banknotes issued by the respective central bank, when part of total banknotes in circulation in the country is known to have been issued by other euro area central banks. 6 The aggregate of banknotes put into circulation by the Banco de Portugal is estimated by deducting the value of banknotes issued held by the Banco de Portugal from the total value of banknotes issued by the Banco de Portugal (Issuance - Inventories of banknotes issued). DEVELOPMENTS IN BANKNOTES PUT INTO CIRCULATION – 2003/2004 U: 106 banknotes, 106 EUR 2003 Denomination (€) Quantity 206 Δ 2003-2004 2004 Value Weight (value) % Quantity Value Weight (value) % Quantity Value 500 0.01 6 0.1 0.12 60 1.2 0.11 54 200 -0.13 -26 -0.5 -0.50 -99 -2.0 -0.37 -73 100 5.28 528 9.8 1.79 179 3.6 -3.49 -349 50 25.73 1,286 23.9 16.60 830 16.6 -9.13 -456 20 128.96 2,579 48.0 148.60 2,972 59.4 19.64 393 10 63.78 638 11.9 68.09 681 13.6 4.31 43 5 72.17 361 6.7 75.90 379 7.6 3.73 19 Total 295.80 5,372 100.0 310.60 5,002 100.0 14.80 -371 Banco de Portugal | Annual Report | 2004 Report and Financial Statements DEVELOPMENTS IN THE QUANTITY OF BANKNOTES PUT INTO CIRCULATION – 2004 5.000 , 4.000 , 3.000 , 2.000 , 3 10 banknotes The year 2003 was characterised by a relative stabilisation of the value of banknotes put into circulation by the Banco de Portugal. Developments in 2004, despite the decrease observed, confirmed the stability trend and the foreseen seasonal pattern over the months. The highest values were recorded in the summer (July and August) and around Christmas. The sharpest decreases occurred between September and November and at the beginning of the year (January). This mainly resulted from the difference estimated on a monthly basis between deposits and withdrawals of banknotes made by credit institutions at the Banco de Portugal. , 1.000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -1.000 , 500 200 100 DEVELOPMENTS IN THE VALUE OF BANKNOTES PUT INTO CIRCULATION 6 10 EUR 150.000 , 6.000 , 125.000 , 10 banknotes 5.000 , 4.000 , 75.000 , 3 3.000 , 100.000 , , 2.000 50.000 , 25.000 , 1.000 , 0 0 Aug MayMay Aug NovNov MarMar DecDec JanJan Feb Mar AprApr May Jun Jun Jul Jul Aug Sep Oct Oct Nov Dec FebFeb SepSep EUR 2003 EUR 2004 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 50 20 10 5 PTE 31.12.01 In terms of annual developments in quantity, €200, €50 and mostly €100 banknotes put into circulation by the Banco de Portugal followed a moderate downward trend. By contrast, the €500 banknote increased slightly, probably reflecting an increase in the demand for this denomination in Portugal in the course of 2004, as in the Eurosystem as a whole. The demand for the lowest denominations (€5, €10 and €20), which are more used in payments, at the Banco de Portugal’s counters increased, in particular for the €20 banknote (lowest migration ratio), which grew by more than 15 per cent. Banco de Portugal | Annual Report | 2004 The conclusions to be drawn from the analysis of the structure of banknotes put into circulation by the Banco de Portugal may be complemented by the observation of the structure of cash withdrawals at ATMs. The choice of the type of denominations made available at the "ATM network" takes into account the cash demand and thus influences the structure of circulation in Portugal. The €5, €10 and €20 banknotes accounted for 98 per cent of total banknotes withdrawn at ATMs in 2004. The €20 banknote accounted for 46 per cent. 207 Report and Financial Statements WITHDRAWALS AT ATMs – 2004 DEVELOPMENTS IN WITHDRAWALS AND DEPOSITS OF BANKNOTES – 2004 U: 106 banknotes Denomination (€) Quantity Weight (%) 106 EUR 1.600 , 1.400 , 500 0 0 200 0 0 100 0 0 50 22 2 20 659 46 600 10 388 27 400 5 357 25 200 Total 1,426 100 1.200 , 1.000 , 800 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Deposits At the end of 2004 the average value of banknotes put into circulation by the Banco de Portugal reached the lowest level recorded in the past six years, standing at €16.10, €2.06 less than in 2003. This was mostly due to growth in the lowest denominations (€20, €10 and €5), which, as a whole, accounted for an increase of around 28 million units in total banknotes put into circulation by the Banco de Portugal up to the end of 2004. AVERAGE VALUE OF BANKNOTES IN CIRCULATION Year PTE EUR 1999 3,805 18.98 2000 3,744 18.67 2001 3,668 18.30 2002 3,889 19.40 2003 3,641 18.16 2004 3,228 16.10 Withdrawals Regarding developments in deposits in terms of quantity of banknotes, there was an increase in most months (except May and October) vis-àvis the corresponding periods of the previous year; the peak was reached in August. In 2004 total deposits in value exceeded by 14.3 per cent those made in 2003. The breakdown of deposits by denomination remained stable over the months. The €20 banknote was the most deposited, followed by €10 and €5 denominations. The banknotes of highest denominations (€500, €200 and €100) recorded a negligible volume of deposits. Deposits and withdrawals of banknotes In the course of 2004 deposits and withdrawals at the Banco de Portugal’s counters by credit institutions followed their typical seasonal pattern, already observed when the escudo was the legal tender currency. The total amounts of banknotes deposited and withdrawn stood at €11,619 million and €11,241 million respectively. The ratio of deposits to withdrawals in value stood at 103.4 per cent, against 99.9 per cent in 2003. 208 Banco de Portugal | Annual Report | 2004 Report and Financial Statements DEVELOPMENTS IN DEPOSITS – 2003-2004 U: 106 banknotes, 106 EUR 2004 Denomination (€) Quantity Value Weight (value) % Value % (value) 0.58 288.77 2.5 0.50 249.33 15.8 200 0.58 116.53 1.0 0.50 99.79 16.8 100 8.32 831.95 7.2 7.32 732.10 13.6 50 60.47 3,023.27 26.0 53.60 2,679.79 12.8 20 248.31 4,966.28 42.7 213.19 4,263.78 16.5 10 171.19 1,711.92 14.7 145.22 1,452.25 17.9 5 136.04 680.18 5.9 136.88 684.38 -0.6 Total 625.49 11,618.91 100.0 557.20 10,161.42 14.3 In most months withdrawals of banknotes in quantity grew vis-à-vis the corresponding months of the previous year. The development curve was quite similar to that recorded in 2003, having followed the same seasonal pattern. The highest withdrawals were reached in July and December. In 2004 total withdrawals in value exceeded by 10.5 per cent those made in 2003. The €20 banknote recorded the highest withdrawals throughout 2004, followed by the €10 and €5 banknotes. Similarly to deposits, highest denominations (€500, €200 and €100) recorded a reduced withdrawal volume. 70 60 50 6 Quantity 500 DEVELOPMENTS IN TOTAL DEPOSITS OF BANKNOTES 10 banknotes Δ 2003-2004 2003 40 30 20 10 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2003 2004 DEVELOPMENTS IN WITHDRAWALS – 2003/2004 U: 106 banknotes, 106 EUR 2004 Denomination(€) Quantity Value 343.21 Δ 2003-2004 2003 Weight (value) % 3.1 Quantity 0.45 Value 225.30 % (value) 500 0.69 52.3 200 0.22 43.17 0.4 0.21 41.51 4.0 100 4.76 476.40 4.2 5.71 571.23 -16.6 50 51.31 2,565.37 22.8 48.09 2,404.40 6.7 20 267.98 5,359.52 47.7 234.41 4,688.17 14.3 10 175.54 1,755.43 15.6 153.32 1,533.24 14.5 5 139.64 698.21 6.2 142.43 712.16 -2.0 Total 640.13 11,241.31 100.0 584.62 10,176.01 10.5 Banco de Portugal | Annual Report | 2004 209 Report and Financial Statements DEVELOPMENTS IN TOTAL WITHDRAWALS OF BANKNOTES Withdrawal from circulation of banknotes denominated in escudos 90 80 70 50 40 6 10 banknotes 60 30 20 10 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2003 2004 As anticipated, in 2004 the withdrawal from circulation of banknotes denominated in escudos held by the public was lower than in 2003. The Banco de Portugal withdrew from circulation around 740 thousand banknotes, worth €12.5 million, through credit institutions and direct exchange at its counters. There are still 13.36 million banknotes to be withdrawn from circulation, equivalent to €128.3 million, which may be exchanged by euro banknotes and coins at the Banco de Portugal’s counters up to 28 February 2022. BANKNOTES DENOMINATED IN ESCUDOS – 2004 U: 106 banknotes, 106 EUR Denominações Withdrawn from circulation in 2004 Value Quantity 10 000$ 0.07 3.7 0.53 26.4 5 000$ 0.26 6.5 1.99 49.6 2 000$ 0.11 1.1 1.97 19.7 1 000$ 0.19 1.0 4.21 21.0 500$ 0.11 0.3 4.66 11.6 Total 0.74 12.5 13.36 128.3 Production and plan for the delivery of banknotes Since the introduction of the euro, the annual production of banknotes has been allocated to NCBs according to a decentralised production scheme with pooling. Thus, each central bank is responsible, on an annual basis, for the production of only one or two denominations to supply to the remaining central banks and the central bank itself. This production is equivalent to a share of the total needs of the Eurosystem. This policy aims at ensuring the supply of banknotes of a consistent and uniform quality, reducing the number of printing works for each denomination, and mainly at obtaining economies of scale in the productive process. The decentralised production model implies that NCBs exchange among themselves the newly printed banknotes they need to include in their annual logistical stocks. Within this framework, 210 To be withdrawn from circulation asat 31.12.04 Quantity Value each frontloading NCB bears the production and transportation costs up to the place of destination agreed with the frontloaded NCB, with no repayment. The total production of the Eurosystem is intended to cover any increase in circulation, to replace banknotes no longer fit for circulation and to ensure that NCBs have sufficient logistical stocks to accommodate requests for banknotes even in periods of seasonal demand peaks. If due to unforeseen increases in demand there are no sufficient banknotes available at the local level, NCBs may also resort to the Eurosystem Strategic Stock. In 2004 the Banco de Portugal was allocated the production of 55.7 million €20 banknotes, which similarly to previous years was commissioned to Valora S.A. printing works7. 7 A company whose major shareholder is Banco de Portugal. Banco de Portugal | Annual Report | 2004 Report and Financial Statements In the course of the year Valora S.A. delivered 35.33 million €20 banknotes to the Banco de Portugal, and 4 million banknotes already produced are expected to be delivered in January 2005. The remaining 16.37 million €20 banknotes missing will be delivered during the first quarter of 2005. Meanwhile, and as foreseen in the delivery plan set for 2004 at the Eurosystem level, the Banco de Portugal delivered 23.9 million €20 banknotes to other NCBs as surplus (logistical stock surplus). Within the same period, the Banco de Portugal did not receive any banknotes from other NCBs or the Eurosystem Strategic Stock. At the production level, the Banco de Portugal monitored the participation of Valora S.A. in projects developed by the European Central Bank, namely calibration and correlation tests involving all labs printing euro banknotes and in the Dummy Banknotes project (tests to banknote features). Sorting and quality of banknotes in circulation Banknotes returned to the Banco de Portugal by means of credit institutions’ deposits were, as usual, processed by sorting systems according to pre-established quality standards that ensure their authenticity and quality, so as to determine those banknotes that are fit to return to circulation and those that should be replaced. These standards were also applied to banknotes received at the counters of the Banco de Portugal, albeit with recourse to individual analysis and other equipment, given that most of these banknotes were damaged. In 2004 669 million euro banknotes were processed by sorting systems, i.e. 20 per cent more than the total volume processed in 2003. This increase is a direct consequence of that seen in deposits. Given their low volume, banknotes denominated in escudos were treated manually in most cases. Of all banknotes processed, 416 million were deemed fit to return to circulation, and the remaining 253 million were destroyed. The annual destruction rate8 stood thus at 38 per cent. 8 Ratio of the annual total of processed banknotes deemed unfit to return to circulation (granulated or perforated) to the annual total of processed banknotes. Banco de Portugal | Annual Report | 2004 BANKNOTES PROCESSED BY SORTING SYSTEMS – 2003/2004 U: 106 banknotes Δ 2003-2004% Denomination (€) 2003 500 0.52 0.58 12 200 0.52 0.59 14 2004 100 7.62 8.75 15 50 54.68 74.24 36 20 211.92 256.29 21 10 143.89 185.09 29 5 137.21 143.40 5 Total 556.37 668.94 20 The rise in the destruction rate compared to 2003 was due to the natural wear that circulation for one more year caused to banknotes and thus to the need to ensure that the quality level of banknotes in circulation would be maintained. In particular, banknotes of lower denominations (€5, €10 and €20) started to show a higher degree of deterioration, which implied an increase in the destruction shares applicable to the respective sorting processes. UNFIT RATE – 2003/2004 Denomination (€) 2003 (%) 2004 (%) 500 6 15 200 10 21 100 13 24 50 10 20 20 18 35 10 25 31 5 40 61 24 38 Overall rate With the purpose of analysing the quality of banknotes in circulation in the Eurosystem, in 2004 the European Central Bank supported their technical assessment, on the basis of groups of banknotes in circulation in all euro area. The denominations of the samples collected ranged between €5 and €50. In the two lowest denominations (€5 and €10) the shares of unfit banknotes in the Portuguese sample, according 211 Report and Financial Statements to the standards adopted, were substantially lower than those of the Eurosystem average. The shares of unfit €20 and €50 banknotes attributed to Portugal stood at the level of the Eurosystem average. In general, the results obtained allow to conclude that, with reference to all denominations analysed, euro banknotes in circulation in our country were considered to be of a good quality. Detection of Counterfeit Banknotes The number of counterfeit banknotes detected in Portugal during 2004 increased from the previous year. This was, however, influenced by the seizing, carried out at the country’s entrance, of a high quantity of counterfeit banknotes, which were therefore not put into circulation. However, figures for 2004 (14,454 counterfeit banknotes) are still relatively lower than the latest computed for banknotes denominated in escudos (17,533 counterfeit banknotes seized in 2001). COUNTERFEIT BANKNOTES currency issuance U: banknotes 500 10 200 181 100 6,629 50 5,082 20 1,860 10 360 5 332 Total 14,454 The quality of counterfeit banknotes detected in Portugal can be divided into two distinct levels. At the first level, the production equipment used are colour printers and photocopiers, and counterfeits are generally of a low quality; at the second level, use if made of offset printing, the production taking place abroad. In any case, the best quality counterfeits detected can still be identified without recourse to auxiliary equipment, i.e. only a careful observation is needed. 212 co de Portugal (National Counterfeit Centre). Policy actions defined by the Eurosystem – DETECTED IN 2004 Denomination (€) Aware of the need to improve the levels of familiarity of the general public with authentic banknotes, during 2004 euro area NCBs, under the aegis of the European Central Bank, developed information and several training materials, with the purpose of deepening acquaintance with euro banknotes, of both professional users and the public, their use and release being expected for 2005. At the domestic level, the Banco de Portugal developed several professional training courses on banknote acquaintance, totalling 772 hours, targeted at professional users (386), in their majority credit institutions’ cash handlers. In order to facilitate the exchange of information and improved coordination between the parties involved in the detection of banknote counterfeits, the Banco de Portugal promoted (Circular Letter No. 11/2004/DET) the setting-up of a narrow contact group, involving partners appointed by credit institutions and representatives of the Ban- At the Eurosystem level and in the course of 2004, the intervention areas and specific responsibilities of all those participating in the cash cycle were defined and harmonised, namely those of NCBs, credit institutions and professional cash operating companies. Within this framework, each central bank can decide the best way to implement the guidelines established, taking into account, inter alia, the economic juncture and national banking structure. The tasks assigned to NCBs in this area that imply the exercise of public authority cannot be performed by third parties. Auxiliary and implementation functions that do not imply any discretionary power can be subject to outsourcing by NCBs under certain conditions. Along these lines and at the domestic level, the Cash Interbank Working Group was created (GTIN), aimed at promoting cooperation and joint action as regards the objectives of the different participants in cash management, namely at the level of its safekeeping, treatment and distribution, under the terms of the national legal framework Banco de Portugal | Annual Report | 2004 Report and Financial Statements and the common policies defined for currency issuance at the Eurosystem level. The GTIN is coordinated by the Banco de Portugal and composed of representatives from the main credit institutions and the Portuguese Banking Association. Still at the Eurosystem level, a framework was created, aimed at harmonising activities for the sorting and authentication of banknotes and the detection of counterfeits. 9 This framework requires credit institutions and other cash handlers recycling banknotes to check the authenticity and quality of banknotes according to the procedures defined by the Eurosystem, prior to putting them into circulation again. A visible segment of this framework had already been initiated in 2003, with the introduction of automated cash-recycling machines, governed by Instruction of Banco de Portugal 4/2003. Investment in this area continued in 2004, mainly in cash-deposit machines. The Banco de Portugal, in its capacity as supervisory entity, tested the equipment, so as to verify compliance with the specifications regarding the identification of the depositor, the banknotes involved and counterfeits, with a view to assigning it the appropriate conformity document. At the strictly domestic level, the Banco de Portugal promoted good practices for the acceptance of cash by credit institutions and the trust that it must deserve. Concretely, through Circular Letter No. 7/2004/DET Banco de Portugal called attention to the fact that the reserve in accepting some denominations imposed by a number of credit institutions goes against the banknotes’ legal tender and contributes to their discredit with the public and operators. 9 "Common framework for the detection of counterfeits and fitness sorting by credit institutions and other professional cash handlers". Banco de Portugal | Annual Report | 2004 8.2.2. Metal coins Circulation The circulation of metal coins continued to follow an upward trend, higher than that of the latest value recorded for the escudo, albeit clearly decelerating in the last two months of 2004. At the end of the year, the value of coins in circulation (including current and collector coins) stood at €415 million, corresponding to 1,398 million coins. Compared to the previous year, there was an increase of €77 million in circulation (+23 per cent), corresponding to 175 million coins. DEVELOPMENTS IN THE VALUE OF METAL COINS IN CIRCULATION – 2004 6 10 EUR 450 400 350 300 250 200 150 100 50 0 Jan Fev Feb Mar Mar Abr Apr Mai May Jun Jun Jul Jul Aug Oct Nov Nov Dez Dec Jan Ago Sep Set Out EUR PTE 31.12.01 The breakdown of circulation at end-2004, taking only into account circulation coins,10 was as follows: 10 Called "change coins" or "current coins". 213 Report and Financial Statements DEVELOPMENTS IN CIRCULATION - 2003/2004 2003 Denomination (€) Quantity 2,00 102 1,00 108.48 108 0,50 108.41 54 0,20 131.89 26 0,10 143.87 0,05 0,02 Δ 2003-2004 2004 Value 50.83 U: 106 coins, 106 EUR Weight (value) % 31.5 Quantity Value 49.50 99 33.7 124.16 16.8 116.79 8.2 14 203.33 222.32 0,01 Total Weight (value) % Quantity Value 28.6 -1.33 -3 124 35.8 15.68 16 58 16.8 8.39 4 145.90 29 8.4 14.00 3 4.5 158.81 16 4.6 14.94 1 10 3.2 238.63 12 3.4 35.29 2 4 1.4 257.17 5 1.5 34.85 1 251.87 3 0.8 298.02 3 0.9 46.15 0 1,221.00 322 100.0 1,388.98 347 100.0 167.98 24 Growth of current coins’ circulation did not exceed 8 per cent in value terms. Deposits and withdrawals of coins BREAKDOWN OF METAL COINS IN CIRCULATION - VALUE 2004 1% Deposits of circulation coins were unevenly distributed throughout the year. The highest monthly amount, i.e. €8.3 million, was recorded in December, corresponding to 8.5 million coins. The annual amount of these deposits reached approximately €32 million. Withdrawals of circulation coins were also uneven throughout the year. The annual amount of withdrawals reached approximately €46 million. 1% 3% 5% 29% 8% promoting the interests of the entities involved in the management of the metal coins system. 17% 36% 2,00 1,00 0,50 0,20 0,10 0,05 0,02 0,01 DEVELOPMENTS IN WITHDRAWALS AND DEPOSITS OF CIRCULATION COINS – 2004 106 EUR Given the specific nature of coins and the need to control the factors conditioning their circulation, in 2004 the Group for the Permanent Monitoring of Metal Coins (GAPM) was created, composed of the Directorate-General of the Treasury, the Portuguese Mint and the Banco de Portugal, with the purpose of monitoring the minting, issuance and placement into circulation, distribution of circulation, commemorative and collector coins, in accordance with Community and national guidelines and with the aim of 214 9 8 7 6 5 4 3 2 1 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Fev Mar Abr Mai Jun Jul Ago Set Out Nov Dez Depósitos Deposits Levantamentos Withdrawals Banco de Portugal | Annual Report | 2004 Report and Financial Statements Reference should be made to the fact that in 2004 the Castelo Branco Agency started to operate as Banco de Portugal’s main coin reception, treatment and distribution centre. This decision was conveyed through Circular Letter No. 5/ 2004/DET, according to which this Agency could receive and treat deposits of metal coins made by credit institutions, with no requirement to fulfil the packaging rules defined by Instruction of Banco de Portugal 3/2003. Collector coins In 2004 the issuance of collector coins11 that had started in the previous year was furthered. Banco de Portugal put into circulation the following coins: Series Theme Value (€) Alloy The Show of Football Defense Shot Goal 8 silver | gold World Patrimony classified by UNESCO in Portugal Christ Convent Historical Centre of Évora 5 silver - Enlargement of the European Union - 2004 8 silver - Athens Olympic games - 2004 10 silver STATUS OF EURO COINS ISSUED ON 31.12.04 U: EUR Issued by the State Species in EURO In circulation In the vaults of Banco de Portugal Total steel cents cents cents 2,980,203.51 5,143,437.80 11,931,445.75 98,440.57 166,187.36 368,294.65 3,078,644.08 5,309,625.16 12,299,740.40 Nordic gold 10 cents 20 cents 50 cents 15,880,978.00 29,179,398.60 58,395,670.50 490,210.80 1,609,082.60 3,771,332.50 16,371,188.80 30,788,481.20 62,167,003.00 Nickel brass/Copper-nickel 1 euro 2 euros 124,158,454.00 99,005,018.00 6,944,329.00 17,600,448.00 131,102,783.00 116,605,466.00 Total 346,674,606.16 31,048,325.48 377,722,931.64 Collector Gold 5 euros 8 euros 15,000.00 148,440.00 0.00 0.00 15,000.00 148,440.00 Silver 5 euros 8 euros 10 euros 3,658,340.00 59,143,416.00 5,062,670.00 556,660.00 2,540,584.00 257,330.00 4,215,000.00 61,684,000.00 5,320,000.00 Total 68,027,866.00 3,354,574.00 71,382,440.00 GRAND TOTAL 414,702,472.16 34,402,899.48 449,105,371.64 For circulation Copper-covered 1 2 5 11 Designation adopted in the Eurosystem for the coins that in Portugal were previously called "commemorative" and that are characterised by different face values, sizes and themes than those of circulation coins (current). These coins only have legal tender in the issuing country. Banco de Portugal | Annual Report | 2004 215 Report and Financial Statements 8.3. Payment Systems In the field of payment systems, the year 2004 was characterised by the series of events described below, at national and European level. At the national level, reference should be made to the entry into force of Notice No. 10/2003 on the collection through account debit, intended to standardise the process of account debit collection, clarifying the rights and duties of the parties involved. This Notice is expected to contribute indirectly to the expansion of the Direct Debit System in operation since October 2000 but that, before the end of 2004, had not gained adequate critical mass to act as the main engine for the development of collection through account debit. The Direct Debit System, in tandem with bankcards, is considered to be one of the payment instruments of the future, within the scope of SEPA – Single Euro Payments Area. The Bank published the sixth issue of the series Cadernos do Banco de Portugal (Banco de Portugal Booklets). This issue is dedicated to bankcards. In view of the growing importance of bankcards in the field of cashless payment instruments in Portugal (they account for more than 50 per cent of such payment instruments), this booklet has raised considerable interest, since it explains the main features and functionality of that instrument, also providing recommendations and precaution measures as to its correct utilisation by both consumers and retailers. Fulfilling its commitments within the scope of the ESCB – European System of Central Banks and taking into account the internal Business Continuity Plan, the Bank has activated the Disaster Recovery Centre, with special focus on the operability of the SPGT/TARGET, considered to be the most critical system due to its impact on the operation of the national financial system as a whole. At the European level, stress should be laid on the progress made in terms of the development of TARGET 2 project, which is nearly concluded, with the publication of the User Detailed 216 Functional Specifications, the pre-project stage. The other project stages have already been outlined, and 2 January 2007 is the date envisaged for the launch of the new TARGET. Also worthy of mention is the SEPA project, which is being developed by European commercial banks. Its purpose is the creation of a common payment area in the EU by 2010, at the latest. In the course of 2004, the EPC – European Payments Council – consolidated its governing structure and clearly defined the steps and deadlines for the implementation of SEPA. National Central Banks, that follow with great interest the project developments, have regularly prepared progress reports on such developments and will continue to monitor closely their implementation at both the national and the European level. TARGET 2 for large-value payments and SEPA for retail payments are the two largest European projects under preparation in the payment systems area. These will be the two major references marking payment systems in Europe in the near future. In Portugal, where the tradition of co-operative solutions on a national scale within the scope of the payment systems has permitted the swift and sustained development as well as the excellence of the present systems, those two projects represent a new challenge. This will require that the parties intervening in the payment systems at different levels (credit institutions, SIBS and Banco de Portugal) must find the best solutions for their implementation at the domestic level. At the operational framework level, the operation of SPGT/TARGET and of SICOI in 2004 (see details in points 8.3.1 and 8.3.2) had the following developments: increase in volume (6.8 per cent) and in values processed (9.1 per cent) in SPGT; more moderate increase in SICOI with a rise of 6.7 per cent in volume and of 1.8 per cent in values processed. The relative position of both systems, within the framework of interbank settlements, remained stable, with the SPGT (only 0.1 per cent of total volume settled) concentrating approximately 95 per cent of total values settled in the two systems as a whole. Banco de Portugal | Annual Report | 2004 Report and Financial Statements 8.3.1. Gross settlement systems: SPGT/ TARGET 12 In 2004, the SPGT, the Portuguese real-time gross settlement system, carried on its activities, showing a moderate upward trend in operations settled, with an overall positive change of 6.8 and 9.1 per cent in value and volume traded respectively, as can be seen in the table below: At the cross-border level, the overall volumes traded declined, mainly on account of the decrease in the volume of cross-border payments sent, vis-à-vis the change in behaviour of some participants in the SPGT, particularly during the second half of 2004. However, the change in value traded did not follow the trend seen in volume traded, recording an overall growth of 7 per cent, OPERATIONS PROCESSED VIA SPGT Value: EUR million 2003 2004 Volume Value Volume Value Volume % Value % 1,286,397 5,168,330 1,373,971 5,636,475 87,574 6.8 468,145 9.1 Domestic transactions 650,364 1,213,695 750,917 1,404,002 100,553 15.5 190,307 15.7 Cross-border transactions 636,033 3,954,635 623,054 4,232,473 -12,979 -2.0 277,838 7.0 Total transactions settled Sent 334,557 1,974,986 305,511 2,119,870 -29,046 -8.7 144,884 7.3 Received 301,476 1,979,649 317,543 2,112,603 16,067 5.3 132,954 6.7 Daily avergares (total) 5,044 20,268 5,305 21,763 261 5.2 1,495 7.4 Domestic transactions 2,550 4,760 2,899 5,421 349 13.7 661 13.9 Cross-border transactions 2,494 15,508 2,406 16,342 -88 -3.5 834 5.4 Sent 1,312 7,745 1,180 8,185 -132 -10.1 440 5.7 Received 1,182 7,763 1,226 8,157 44 3.7 394 5.1 Growth was stronger in the domestic segment, with an increase of approximately 16 per cent both in volume and in values traded. This change was chiefly explained by transactions received from the Real Time Settlement System of Euronext Lisbon, whose connection to SPGT was established in November 2003, and whose operation in 2004 had as a result an increase of approximately 100,000 transactions to be settled in the system on an individual basis. In view of this increase, the end of financial settlement in the Derivatives Market in March 2004, in the wake of the migration to Clearnet Paris, had no impact on the volume traded by the system. 12 Change The Settlement System for Other Depositors (Portuguese acronym: SLOD) processed 49,367 transactions, to an approximate amount of €88 billion, accounting for a growth rate of approximately 36.7 per cent of the volume of transactions and 34.1 per cent of the value traded. As regards gross settlement systems combined (SPGT and SLOD), it represented 3.5 per cent of the volume and 1.5 per cent of the value traded. Banco de Portugal | Annual Report | 2004 explained by the average increase in value registered in interbank payments processed. During 2004, in terms of the operation of the SPGT, the technical and computer adjustments were consolidated in the SPGT platform of the BP, particularly associated with the implementation of the Disaster Recovery Centre, essential for the activation of the PCN/ PRCC13 of the BP in case of serious disaster/ contingency. The process of stabilisation of adjustments in the computer structure of the BP spilled over into some anomalous occurrences observed during the year, but usually controlled and solved, so as to avoid significant consequences in the daily continuing processing of payments through the SPGT. As a result, the service availability indicator observed in the system, mainly as regards the TARGET/ interlinking segment, reflects the impact of such occurrences when decreasing from the 13 Business Continuity Plan/Disaster Recovery Plan. 217 Report and Financial Statements 100 per cent availability seen in the previous year to 99.86 per cent in 2004. However, TARGET overall availability indicator continues to point to a positive trend, similarly to previous years, and moved from 99.79 per cent to 99.81 per cent. As regards contingency procedures, regular tests were carried out at both the domestic and cross-border levels. At the domestic level, regular tests of the emergency circuit (via SWIFT and fax) were carried out with all the participants in the SPGT in March and October. Real simulations of PCN/PRCC activation were carried out for the first time on 1 April and 2 July, with the SPGT completing a full operation day at the Disaster Recovery Centre. Still within the scope of contingency at the domestic level, the monitoring of the SPGT was quarterly carried out from the 2nd control room of the SPGT, with the purpose of maintaining an alternative contingency backup centre operational, enabling the management of the system in case of any malfunctioning in the main system control room. At the cross-border level, several contingency tests were carried out with other National Central Banks in March, April, September and December, with recourse to the utilisation of alternative contingency channels (SWIFT and fax). Also worth mentioning are the tests made to the recovery files, the tests carried out on 29 March and 2 April intended to assess the capabilities of the NCB to process critical payment volumes in a contingency situation, and also the tests made to the volume of the SPGT with the ECB on 6 May. During 2004, the availability of the Direct Consultations Service to the SPGT via the BPNet platform is worthy of note, as well as, from 29 April, the integration of the BP-SIBS circuit in that platform. The reporting schemes between the BP and SIBS in case of failure in the respective circuit were also the object of revision. A new functionality was introduced in the maintenance of the SPGT central application. It permits, in case of serious disruption of the BP-SIBS channel, the general activation/deactivation of the emergency circuit by the BP, which is reflected in the Direct Consultations to the SPGT, and also the prevention of payment duplications due to the utilisation of extraordinary manual procedures in case of contingency. In addition, 218 the Manual of Procedures of the SPGT was updated, including a revision of the emergency procedures in cases of failure during the interbank period or other failures that may imply the possibility of general activation of the emergency circuit by the BP. The terms of the agreement for the settlement of the PEXSettle system were also specified. This system was created at the initiative of some national banks and its start up is expected to occur in the course of 2005. TARGET 2004 release, implemented on 14 June, only envisaged extending the IBAN validation to some new countries. Still at the cross-border level, it was decided to specify and start the processing of aggregate data referring to the utilisation of intraday credit via the present TARGET and the revision of the statistical framework, whose implementation is foreseen only for TARGET2. 2004 was chiefly marked by the specification works of TARGET2, in particular as regards the assessment of technical and operational issues (GFS "General Functional Specifications" and UDFS/"User Detailed Functional Specifications"), as a result of the proposal advanced by 3 central banks (Central Banks of Germany, France and Italy). In addition, some aspects such as the future management of the Single Shared Platform (SSP), Eurosystem’s internal organisation, in addition to the costs envisaged with the construction of the SSP, were also examined. At the national level, meetings were organised with the SPGT Pilot Group (irrespective of the dissemination of the general and detailed specifications available on TARGET2 to all participants in the SPGT). Therefore, in May, the SPGT Pilot Group addressed a letter to the BP and to the ECB on its position regarding TARGET2; in July, the two-stage migration strategy agreed between the BP and credit institutions was defined and approved by the Board of Directors. According to this strategy, most of the infrastructures associated with the present SPGT will be maintained at a 1st stage (2007), and BP will directly participate in TARGET2 representing credit institutions (indirect participants) that so wish. At a 2nd stage (to be defined between 2007 and 2010) SPGTbased domestic facilities will be abolished, and Banco de Portugal | Annual Report | 2004 Report and Financial Statements the whole processing of payments and interbank settlements will be redirected to the SSP; in the October meeting, the SPGT Pilot Group assumed this strategy and is now expected to define the most suitable date for the start up of stage 2 of the migration. Finally, the ECB Governing Council approved the 2nd and 3rd Progress Reports on TARGET2 on 22 July and 16 December respectively, with information on the “core services” of the SSP, some topics on project financing, contractual aspects, price policy and management of the shared platform, in addition to the approval of an overall plan for the migration of the existing systems. 8.3.2. Interbank Clearing System: SICOI In 2004 the Interbank Clearing System (SICOI) recorded a 6.7 per cent increase in the volume of operations cleared and a 1.8 per cent rise in value, as can be clearly seen in the table below. The increase in the volume of cleared operations was largely due to growth in the Direct Debit and Multibanco subsystems. The Interbank Electronic Transfer (TEI) subsystem also had an increase in both volume and value of cleared operations, albeit lower (by 4.1 per cent and 8.3 per cent respectively). Conversely, the Cheques and Bills of exchange subsystems recorded a decrease in cleared operations in both volume and value. The Direct Debit System (SDD) recorded the highest growth rates in volume and value (300.5 per cent and 235.4 per cent, respectively), although still showing a low percentage vis-à-vis the total volume of operations processed within the scope of SICOI (approximately 1.5 per cent). In 2005, with the announced migration of major service companies (telephone and electricity) to this subsystem, SDD is expected to stand in a relevant position, corresponding to the importance of this instrument in the future (in Portugal and in Europe) in the case of direct debits. In 2004, the number of cleared cheques and bills of exchange continued to fall by 6.1 per cent and 81.1 per cent respectively, thus reinforcing the trend towards the utilisation of dematerialised payment instruments, to the detriment of paper-based instruments. In the case of Bills of exchange, the sharp fall was due to the migration of collections to the Direct Debit subsystem, pursuant to Notice No. 10/2003 of 17 September. The settled amounts of paper-based instruments processed via SICOI also had a negative change, albeit more marked in Bills of exchange, for the above-mentioned reason. In the case of the Cheques subsystem, the 2.9 per cent decrease of the settled value, vis-à-vis the 18.1 per cent registered in 2003, indicates the lower utilisation of cheques, but with higher single amounts. This instrument continues to have a significant weight in SICOI, accounting for approximately 2/3 of the values settled in SICOI (excluding cheques above € 100 thousand, which are gross settled in the SPGT and whose value corresponds to only 0.14 per cent of the volume processed, which is equivalent to 58 per cent of the values settled and cleared in SICOI). OPERATIONS PROCESSED VIA SICOI Value: EUR million 2003 Total Cleared 2004 Change Volume Value Volume Value Volume % 1,324,4 302,935 1 413,6 308,427 89,2 6.7 5,493 1.8 200,1 196,811 188,0 191,193 -12,1 -6.1 -5,618 -2.9 Cheques Bills of exchange Value % 4,6 3,642 0,9 2,657 -3,7 -81.1 -984 -27.0 42,8 55,555 44,6 60,145 1,8 4.1 4,591 8.3 Direct Debit 5,2 1,343 20,8 4,505 15,6 300.5 3,162 235.4 Multibanco 1,071,7 45,584 1,159,4 49,927 87,7 8.2 4,343 9.5 TEI Banco de Portugal | Annual Report | 2004 219 Report and Financial Statements With respect to cheques returned, representing approximately 0.7 per cent of cheques cleared, there was a decrease in both volume (11.7 per cent) and value (4.8 per cent). The most common reason for cheque returns continues to be " lack of or insufficient funds" (in about 81 per cent of the cases). With regard to the promotion of the smooth operation of the retail payment systems, 2004 was marked by the somewhat significant migration to the Direct Debit System of previous interbank collections made in compliance with Protocols between banks and creditors forcing these to open an account with every bank of their customers in order to carry out the respective debits. In turn, with a view to maintaining competition among systems, the rights and duties and the performance regulations of all intervenients in the collection process are now similar in both account debit payment means, pursuant to Notice No. 10/2003. 8.3.3. Regulation and control of means of payment In 2004, 37 requests for approval of new cheque models were submitted by credit institutions authorised to receive deposits and to accept debit and credit entries in the respective accounts by means of this payment instrument. The same request was submitted by the DirectorateGeneral of the Treasury, taking into account the Government Treasury System, approved by Decree-Law No. 191/99, of 5 June, and the participation of the Treasury in SICOI. The number of requests nearly tripled from the previous year. The reason behind such high increase in requests lies in the fact that those entities had run out of stocks of the cheque models designed in line with the Regulation of Banco de Portugal changed in 2003 by Instruction No. 26/2003, published in the Official Gazette no.10 of 15.10.2003. The instruction in question standardised the cheque document, bringing its features into line with the requirements for the collection and circulation of cheque images, as a result of the entry into force of this system. As mentioned in the beginning of point 8.3, Banco de Portugal Booklet No. 6 on "Bankcards" 220 was published and distributed. Bankcards are the most widely used payment instrument for goods and services in Portugal. In the distribution of this Booklet, in addition to the Bank’s regional information desks, the Bank had the participation of credit institutions, town halls and local authority consumer information centres, traders and consumer protection associations. The Bank also satisfies every request of hard copies submitted to it. This Booklet, as well as the corresponding English version, together with the other numbers of the series, are available on the Banco de Portugal’s website. In terms of the tasks incumbent on the Bank within the scope of the legal system governing the uncovered cheque (Decree-Law No. 454/91, of 28 December) incorporated in the protection of this payment instrument, 80,795 entities entered the list of cheque defaulters in 2004, corresponding to a decrease of 10,759 from the previous year. As at 31st December 2004, the list of cheque defaulters included 130,633 natural and legal persons, which represented a decline of approximately 5 per cent from 2003. Credit institutions are not compelled to sign cheque conventions with their customers, but they cannot supply cheques to the entities included in the above-mentioned list, except single cheques intended for withdrawals or bank certified cheques intended for specific payments. Taking into account the Bank’s field of competence in restricting the use of cheques, 18,979 proceedings for the removal from the list instituted in 2004 were decided in favour of the removal, on account of circumstances deemed sufficient to justify the use of this payment instrument before the end of the two-year permanence period. The names of 8,427 entities were annulled from the list for a number of reasons, some of which of a technical nature, such as the demonstration of unawareness of coholders of the accounts whose cheques were the object of user restriction. The total number of outgoings from the list of cheque defaulters attained 88,365 in the course of the year, approximately 70 per cent of which for termination of the maximum permanence period. In 2004, by virtue of the changes to ECB Guideline 2001/3 on TARGET, some changes were introduced in the reimbursement scheme, Banco de Portugal | Annual Report | 2004 Report and Financial Statements similarly to developments in the previous year, which implied the corresponding adjustment of the SPGT Regulation, Instruction No. 115/96, Annex II. 8.4. Monetary Policy Implementation and Management of the European Central Bank's Foreign Reserves 8.4.1. Monetary policy implementation The most important aspect of the implementation of the single monetary policy in 2004 was the adoption of a new operational framework as from 8 March. With this change, the ECB aimed at improving efficiency in the implementation of the single monetary policy, with a view, on the one hand, to ensuring greater stability of shortterm interest rates (in particular overnight) and, on the other hand, to minimising the effects of expectations of a change in key interest rates on main refinancing operations (MROs) tenders. In the new operational framework for monetary policy,14 the minimum reserve maintenance period always starts on the settlement day of the MRO following the Governing Council meeting at which the monthly assessment of the monetary policy stance is pre-scheduled, changes to the levels of interest rates on standing facilities take effect simultaneously with the start of the maintenance period and the maturity of MROs was shortened from two weeks to one week. In addition, together with the release of the estimate of autonomous factors, the ECB started to announce the benchmark allotment of MROs, which is considered neutral vis- à-vis the liquidity needs of the Eurosystem. These elements are published on the announcement day of the MRO, and they are revised on the allotment day, so as to contribute to a better interpretation of the liquidity management strategy. Longer-term refinancing operations (LTROs) continue to be conducted with 14 For further details, see the articles entitled “Changes to the Eurosystem’s operational framework for monetary policy” and “Initial experience with the changes to the Eurosystem’s operational framework for monetary policy implementation”, published in the August 2003 and February 2005 issues of the ECB’s Monthly Bulletin respectively. Banco de Portugal | Annual Report | 2004 a monthly frequency (as a rule, on the last Wednesday of each calendar month) and a maturity of three months. The implementation of this new operational framework for monetary policy was preceded by an extended transitional maintenance period (from 24 January to 9 March), during which MROs continued to be conducted with a maturity of two weeks. As regards the collateral policy, the changes to the operational framework relate to the risk control system applicable to assets used in Eurosystem credit operations. In this case, liquidity categories were introduced for tier one assets and valuation haircut levels for tier one and tier two assets were revised. In addition, initial margins set up as a reinforcement of collateral used in Eurosystem credit operations ceased to be applied. In 2004 the monetary policy stance of the ECB in terms of interest rates did not undergo any changes, and thus its key rates remained at the levels set in the Governing Council meeting of 5 June 2003, i.e. the minimum bid rate on MROs at 2 per cent and the interest rates on the marginal lending facility and the deposit facility at 3 and 1 per cent respectively. The decision to keep interest rates at historically low levels reflected the Governing Council’s assessment of the prospects for medium-term price stability and of the economic situation in the euro area. It should be noted that the economic rebound continued moderately in the course of the year, essentially fostered by the behaviour of external demand. In the second half of the year, some mixed signals arose for the euro area economy. Energy prices followed a sustained upward trend throughout 2004, with direct effects on the level of inflation in the euro area, although their pass-though was mitigated by the appreciation of the euro against the US dollar. Against this background, the Governing Council considered that there were some risks to price stability, especially those stemming from energy price developments and potential second-round effects, which, although not having materialised, would need to be carefully monitored. However, 2004 was also marked by the adoption of more restrictive monetary policy stances by other monetary authorities. The Bank of England’s base rate and the US Federal 221 Report and Financial Statements Reserve’s key rate (fed funds rate) rose from 3.75 per cent to 4.75 per cent and from 1 per cent to 2.25 per cent respectively. 8.4.1.1. Liquidity management In 2004 the interbank liquidity deficit of the Eurosystem amounted, on average, to €311 billion, growing by 29 per cent from the previous year. These developments mainly originated in the increasing liquidity needs associated with autonomous factors, which totalled €178 billion (56 per cent more), following the upward trend of the previous year. The demand for reserves also grew, albeit at a more subdued pace (5 per cent). The increase in autonomous factors was to a large extent explained by developments in "banknotes in circulation", since this factor has a rather significant weight in total autonomous factors. In annual average terms, "banknotes in circulation" induced an increase in liquidity needs of around 20 per cent. In effect, growth of "banknotes in circulation" remained strong in the course of 2004, reflecting the increase in euro banknotes demand not only by residents, but also by non-euro area resident economic agents. "Government deposits" also contributed to the increase in autonomous factors, given that they grew by 6 per cent. These two factors taken together remain those mainly responsible for the volatility of autonomous factors in the course of the year. The forecast for autonomous factors was, in general terms, adequate to the activity in the euro money market, and contributed to the effective adjustment of the banking system’s liquidity by regular refinancing operations, particularly MROs. Concretely, forecast data made a very good anticipation of the values observed, since there was a decline in the average absolute forecast error to €0.7 billion (compared with €1.2 billion in 2003). In Portugal, interbank liquidity continued to be in surplus, with an annual average excess of €2.6 billion. However, this value corresponds to a decline of around €2.1 billion from the previous year. The average balance on autonomous factors declined by 30 per cent, to €4.8 billion, but the Portuguese liquidity situation remained opposite to that of the Eurosystem, since the sum of 222 autonomous factors in Portugal does not result in a deficit of interbank liquidity, given the higher weight of the items "financial assets in euro" and "foreign reserves and gold" in aggregate terms. The volatility of autonomous factors was essentially determined by developments in "banknotes in circulation", which have contributed to the decrease in excess liquidity. In fact, "banknotes in circulation" followed an upward trend in 2004 (increasing by 25 per cent in average terms), but this was exclusively due to the rise in the component regarding adjustments originating in the CSM15, given that the average balance on "actual banknotes" declined by 4.5 per cent from 2003. Finally, the change in "intra-Eurosystem liabilities" related to operations settled via TARGET continued to be decisive to the change in interbank liquidity in Portugal. In average terms, this item showed a net creditor position of resident institutions of €9.3 billion (20 per cent more than in 2003). 8.4.1.2. Open market operations and standing facilities The increase in the liquidity needs of the Eurosystem was accompanied by the increase in the outstanding amount of regular open market operations. In fact, the average daily balance on these operations amounted to around €312 billion, i.e. it grew by approximately 30 per cent from the previous year. The breakdown by type of operation showed a decrease to 77.5 per cent (from 81 per cent in 2003) in the share of MROs, which moved further towards the intended share of 75 per cent set by the ECB. The ECB conducted 52 MROs in 2004, of which 9 with a maturity of two weeks in accordance with the former operational framework and 43 with a maturity of one week under the new operational framework. The average amount allotted in two-week MROs reached approximately €107 billion, corresponding to an increase of around 12 per cent 15 Capital Share Mechanism. Banco de Portugal | Annual Report | 2004 Report and Financial Statements from 2003. In MROs conducted under the new operational framework, the average allotment amount was €247 billion. This excludes the operation conducted on 9 March due to its lower allotment amount, given the outstanding amount allotted in the last two-week MRO. With regard to allotment rates, the weighted average rate stood 1 basis point above the respective marginal rate, in average terms. The spread between the marginal rate and the minimum bid rate narrowed, in average terms, from 5 basis points in 2003 to 2 basis points in 2004, due to the marginal rate being equal to or rather close to the minimum bid rate (up to October the spread did not exceed 2 basis points). Towards the end of the year, the spread between these rates widened, and the highest spread (9 basis points) was reached in the last MRO of 2004. As from the maintenance period ended on 11 October, the ECB chose a strategy in which the allotment amount in MROs would be higher than the benchmark allotment, so as to supply the market with liquidity conditions favourable to the narrowing of the spread between overnight rates and the minimum bid rate. The average bid amount was also higher than that seen in the previous year, especially in MROs conducted under the new operational framework, in which the average amount of bids reached €315 billion, corresponding to a bid cover ratio of 1.28. The participation of counterparties seems to have reversed the downward trend of recent years, since the average number of counterparties increased from 267 to 339, taking into account the year as a whole. This trend gained further importance in the new operational framework, which counted on the participation of 353 counterparties, on average. Reference should also be made to two underbidding episodes in MROs, on 20 February and 24 March. Both originated in similar market conditions, namely the great stability of very short-term interest rates at levels quite close to the minimum bid rate. Their effects were a slight upward pressure on very short-term rates until the following MRO, since the ECB, in the wake of the underbidding episodes observed, did not resort to liquidity-providing fine-tuning operations to restore liquidity conditions. The intended volume of LTROs in 2004 was €25 billion (€10 billion more than in LTROs Banco de Portugal | Annual Report | 2004 conducted in 2003), which was fully allotted in each of the 12 LTROs conducted. The average spread between the weighted average allotment rate and the marginal rate remained at 2 basis points in 2004. However, the average spread between the three-month EURIBOR and the marginal rate widened to 6 basis points (from 2 basis points in 2003). The amount of bids increased by 43 per cent, on average. The average bid cover ratio declined from 1.98 in 2003 to 1.70 in 2004. There was also an increase in the average number of participants (159 against 133). The ECB announced on 14 January 2005 an intended volume of €30 billion for LTROs to be conducted this year, the €5 billion increase from 2004 being accounted for by the enlargement of the liquidity deficit. In 2004 the ECB conducted 3 fine-tuning operations (1 liquidity-providing and 2 liquidity-absorption operations), all of them in the last day of the respective maintenance period, aimed at adjusting one-off liquidity imbalances and contributing to the stabilisation of the overnight rate. Fund-absorbing operations took place on 1 May and 7 December, in which counterparties placed deposits to the amounts of €13 and €15 billion respectively, at a fixed rate of 2 per cent. The liquidity-providing operation was conducted on 8 November, with an allotment amount of €6.5 billion and a marginal rate of 2.06 per cent. With regard to counterparties resident in Portugal there was a 21 per cent increase in the average daily outstanding amount of regular refinancing operations, to around €2 billion. The breakdown of this balance remains contrary to that of the Eurosystem, since the share of MROs was only 18 per cent, while the share of LTROs was 82 per cent. This shows that counterparties resident in Portugal continue to prefer refinancing with the ECB through LTROs. The number of participants continued to be low in both types of operation, i.e. the average number of participants in MROs increased from 1 to 3, while in LTROs it remained at 2. In MROs the average amount allotted to counterparties resident in Portugal in two-week operations was €71 million (€109 million in 2003) and €343 million in operations conducted under the new operational framework. In LTROs, the 223 Report and Financial Statements average allotment amount rose to €746 million (from €515 million in 2003). In fine-tuning operations conducted in 2004, counterparties resident in Portugal did not submit any bids. Recourse to standing facilities in the Eurosystem declined in 2004, having totalled, in average daily terms, €212 million in the marginal lending facility and €188 million in the deposit facility. Although the decrease in the use of the marginal lending facility was slightly more marked than in the deposit facility, the higher relative importance of the former was maintained (53 per cent). Recourse to standing facilities by counterparties resident in Portugal continued to be rather low and concentrated on the deposit facility on the last day of the maintenance period, recording, on average, €0.9 million (55 per cent less than in 2003). Only once in 2004 did these counterparties resort to the marginal lending facility, on 13 September, to an amount of €11 million. Finally, on 4 November the last tranche of Banco de Portugal’s debt certificates amounting to €1,054 million was redeemed. After this redemption, the Eurosystem’s balance sheet ceased to include any monetary policy operations conducted in Stage Two of Economic and Monetary Union. 8.4.1.3. Euro money market The functioning of the euro money market in 2004 was pursued in a context of relevant efficiency and stability in liquidity conditions. This favourable juncture was further reinforced by the smooth adaptation of counterparties to the new operational framework for monetary policy. Money market interest rates were constrained in the course of 2004 by market expectations about the economic recovery in the euro area and the ECB’s monetary policy stance. Thus, the slope of the yield curve for EURIBOR rates was adjusted throughout the year, showing a larger fluctuation at the longer end (from 6 to 12 months), in line with market expectations. The pattern of interest rates in shorter-term segments, i.e. up to one month, was characterised by high stability due to balanced liquidity conditions. 224 Thus, the EONIA remained at levels close to those of the minimum bid rate in MROs, with an average spread of 5 basis points in 2004. The highest volatility occurred, as usual, at the end of each reserve maintenance period and at the end of each month, related to counterparties’ treasury adjustments. The average daily amount of contributions from institutions to the EONIA panel decreased by 12 per cent, standing at €35 billion. This was mainly due to the decline in the amounts of contributions from institutions of countries with a higher weight in the panel, like Germany, France and Italy. In Portugal the opposite took place, since the average contribution from the bank participating in the panel increased by 5 per cent. Interbank trading in Portugal as regards unsecured operations carried out through SITEME decreased slightly in 2004, to an average daily amount of €810 million, which corresponds to a fall of 3 per cent from the previous year. The breakdown of transactions by maturity remained identical to that of previous years, with overnight transactions accounting for the bulk of business (86 per cent). Banco de Portugal Instructions on the domestic interbank money market and SITEME were revised, so as to accommodate a few adjustments to the operation of SITEME, including the change in the type of access by participating entities. 8.4.1.4. Minimum reserve system In 2004 the average value of minimum reserves in Portugal increased by 2.4 per cent on a yearly basis, resulting from an equal increase in the reserve base subject to a reserve ratio of 2 per cent (liabilities with an agreed maturity of up to 2 years). The total reserve base, in turn, grew by 5.4 per cent, thus reinforcing the trend of change in the structure of liabilities of credit institutions on behalf of liabilities subject to a reserve ratio of 0 per cent (liabilities with an agreed maturity of over 2 years). The entry into force of the new operational framework for monetary policy on 8 March 2004 seems to have been a key factor in the change of the typical pattern of fulfilment of minimum Banco de Portugal | Annual Report | 2004 Report and Financial Statements reserves seen in Portugal in recent years. In fact, by contributing to increase the stability of short-term interest rates (namely overnight) and to mitigate the effects stemming from expectations of a change in key interest rates on MRO tenders, the pattern of fulfilment of minimum reserves became much more regular. This notwithstanding, resident credit institutions continue to prefer to hold minimum reserves at the start of the maintenance period, while in the Eurosystem as a whole the situation is precisely the opposite. In the latter case, although the consequences of the entry into force of the new operational framework are not quite perceptible, there seems to be an anticipated movement of minimum reserve holdings to the start of the second week of the period. The average daily volatility associated with reserve holdings was lower in Portugal and the euro area as a whole during 2004, compared with 2003. However, volatility in Portugal continues to be higher than in the euro area. In Portugal, in the same period, the average level of total excess reserves as a percentage of minimum reserves increased slightly (from 0.34 per cent in 2003 to 0.36 per cent in 2004). The Eurosystem recorded the opposite situation, with excess reserves declining from 0.51 to 0.49 per cent, thus reinforcing developments seen in 2003. Similarly to the most recent years, excess reserves in Portugal remained below those seen in the euro area. In 2004 three cases of non-compliance occurred in Portugal, accounting for a substantial decrease from 2003, similar to that in the relative importance of low values, as measured by the weight in minimum reserves, which declined to 0.001 per cent (0.006 per cent in 2003). In the Eurosystem, notwithstanding the decrease in low values, their relative importance increased marginally to 0.006 per cent of minimum reserves (0.005 per cent in 2003). By the end of 2004 the number of credit institutions subject to minimum reserves in the euro area amounted to 6,406, of which around 3 per cent held reserves with Banco de Portugal. The latter did not undergo significant changes from the previous year. 8.4.1.5. Eligible assets At the end of 2004 the total amount of eligible assets for Eurosystem credit operations included in tier one and tier two by Banco de Portugal amounted to €69.3 billion (growing by 10.8 per cent from 31 December 2003). Tier one increased slightly its share in domestic collateral as a whole16, accounting for 99.95 per cent of the total. In turn, at end-2004 tier two included only one bond (private debt bond), given the redemption, during the previous year, of a debt instrument issued by the Regional Government of Azores. Growth in the total amount of domestic collateral is explained by the behaviour of tier one assets, more precisely those in the category “Debt securities issued by the central government”, which increased by 13.1 per cent during 2004. In this respect, in the course of the previous year, there were five new issues of Treasury bills and one new issue of Treasury bonds. In turn, the last series of Banco de Portugal’s debt certificates matured in 2004. This type of security was therefore excluded from the list of eligible assets proposed by Banco de Portugal. Overall, in 2004 the use of domestic collateral by national counterparties accounted for €1.7 billion in monthly average values (45.5 per cent of the total collateral delivered by these counterparties to collateralise monetary policy and intraday credit operations, compared with 69.5 per cent in 2003). For the first time since the start of Stage Three of Economic and Monetary Union, this type of collateral assumed a secondary role vis-à-vis collateral deposited in international central securities depositories. With regard to the breakdown of domestic collateral by category, securities issued by the central government in 2004 accounted for 61.1 per cent of the total assets deposited in national central securities depositories, mobilised by Portuguese counterparties, and turned out to be the most frequently used type of collateral. Due to the fact that Banco de Portugal’s debt certificates were no longer included in the eligible 16 Banco de Portugal | Annual Report | 2004 Domestic collateral correspond to financial assets registered in the Portuguese central securities depositories (INTERBOLSA and SITEME) that fulfill Eurosystem’s eligibility criteria. 225 Report and Financial Statements asset list (both final series matured in November 2003 and 2004), their average use lost importance in 2004. This category of securities accounted for 24.3 per cent of domestic collateral delivered in 2004 (43.1 per cent in 2003). As previously mentioned, in 2004 the use of collateral deposited in international central securities depositories by Portuguese counterparties through the correspondent central banking model (CCBM) became more relevant than ever vis-à-vis domestic collateral. In fact, these securities accounted for 54.5 per cent of total assets delivered to collateralise Eurosystem credit operations (around €2 billion in average monthly values), which is reflected in the 93.5 per cent increase in the use of this type of asset compared with the previous year. Corporate securities accounted for 94.8 per cent of this total, stress being laid on the use of assetbacked securities (91.9 per cent of the collateral deposited abroad or 50.1 per cent of the total use of collateral by national counterparties to collateralise Eurosystem credit operations). Almost all asset-backed securities correspond to issues abroad by “special purpose vehicles”, based on assets originated by entities established in Portugal. With regard to the participation of Banco de Portugal in the CCBM as correspondent central bank, the average monthly value of securities (almost exclusively Treasury bonds and bills) held by Banco de Portugal on behalf of other Eurosystem central banks amounted to around €7.6 billion in 2004, accounting for a 41.6 per cent increase from the previous year (€5.5 billion). This amount has been growing on an annual basis since the creation of the CCBM. In 2004, similarly to previous years, German counterparties were the main users of the collateral deposited in Portuguese central securities depositories to collateralise Eurosystem credit operations. 8.4.1.6. Review of the Eurosystem collateral framework Following the public consultation entitled "Measures to improve the collateral framework of the Eurosystem" carried out in 2003, the Governing Council approved the introduction 226 of a single list in the collateral framework of the Eurosystem, with a view to gradually replacing the current two-tier system of eligible collateral. The first step towards establishing a single list, announced to the market on 10 May 2004, consists of the introduction of a new category of previously ineligible assets, as well as the change in the eligibility criteria relating to some marketable debt instruments currently included in tier two. This step will be implemented by May 2005. The category of assets that will become eligible within the scope of the first step of the single list are debt instruments denominated in euro, issued in the European Economic Area (EEA) but settled (i.e. held) in the euro area, by issuers established in the non-EEA G10 countries (currently the United States, Canada, Japan and Switzerland). The eligibility of these assets must be supported by an adequate legal opinion. Changes to the eligibility criteria refer to three categories of assets, namely: (i) debt instruments listed or quoted on non-regulated markets, i.e. markets that are not in accordance with the Investment Services Directive (Council Directive 2004/39/EC); (ii) debt instruments issued by credit institutions; and (iii) marketable debt instruments not complying with the tier one criterion on the financial soundness of the issuer. Non-regulated markets were assessed according to three "high-level" principles (safety, transparency and accessibility) defined by the Eurosystem. In May 2005 a final list of nonregulated markets deemed eligible will be published. Assets traded on markets included in the final list will be immediately eligible within the scope of the single list. A phasing-out period of 36 months is foreseen, starting from 10 May 2004, for assets traded on non-regulated markets assessed as not eligible. After this phasing-out period, these assets cannot be accepted anymore as collateral in Eurosystem credit operations. With regard to uncovered debt instruments issued by credit institutions, the criterion that each issue should have an issue or programme rating will be relaxed. Thus, the single list can include uncovered debt instruments issued by credit institutions based on the rating of the issuer. In turn, marketable debt instruments not complying with the tier one criterion on the financial soundness of the issuer will remain in Banco de Portugal | Annual Report | 2004 Report and Financial Statements tier two at least until the Eurosystem’s overall credit assessment framework to be applied to the single list of collateral has been finalised. The second step of the introduction of the single list, announced to the market on 5 August 2004, consists of: (i) the inclusion of bank loans from all euro area countries (the respective dates and eligibility requirements are under study); (ii) the inclusion of non-marketable retail mortgage-backed debt instruments (currently, only includes Irish mortgage-backed promissory notes) and (iii) the exclusion of equities, as from 30 April 2005. 8.4.2. Management of the European Central Bank (ECB) foreign reserves Within the scope of the Eurosystem, the management of the ECB foreign reserves is carried out within a decentralised framework by NCBs, under an agency agreement and in strict compliance with the rules and guidelines established by the ECB. By the end of 2004 the Banco de Portugal's share of ECB’s foreign reserves amounted to €883 million, of which €694 million were accounted for by foreign currency assets, whose management continued to be executed by Banco de Portugal, and €188 million in gold. In addition to its management tasks, Banco de Portugal continued to actively participate in the relevant ECB Committees and Working Groups, which dealt with issues regarding the reserve management framework, namely concerning research on new instruments and risk control, as well as organisational issues within the scope of the Guideline and Procedures governing this business and whose changes were also reflected in the Banco de Portugal's Manuals of Operations for ECB’s Reserve Management. 8.5. Analysis and Research In the course of 2004 economic analysis and research developed by Banco de Portugal continued to focus on three main objectives: advice to the Governor of Banco de Portugal in the monetary policy decision-making process Banco de Portugal | Annual Report | 2004 within the framework of the Eurosystem; analysis and forecast of the Portuguese economy; analysis and monitoring of financial markets and systems. Regarding the advice to the Governor of Banco de Portugal, reference should be made to the regular monitoring of the euro area economy and its international background, as well as the issue of technical opinions on all relevant matters in monetary policy discussions within the framework of the Eurosystem. Banco de Portugal continued to make estimates and projections for the Portuguese economy and to develop and improve macro-economic forecasting and modelling tools. The Bank also produced research on the Portuguese economy on various subjects, such as the labour market, fiscal policy, the national accounts methodology, the performance of the Portuguese exports and of the banking industry and the stock market. In 2004 the Monthly Economic Indicators and the Economic Bulletin continued to be published according to the schedule announced at the end of 2003. As in previous years, in addition to articles of a technical nature covering several subjects, the Economic Bulletin included texts on economic policy and situation, namely estimates and forecasts for the Portuguese economy and the analysis of the banking system performance and of the main developments in the foreign exchange and derivatives market. The results of the quarterly Bank Lending Survey continued to be disclosed by Banco de Portugal on the Internet, following the ECB’s disclosure of the corresponding aggregate results for the euro area. In 2004 Banco de Portugal continued to publish several research works in its Working Papers series, namely 20 articles over the year. Some of the works produced by the economists of the Economic Research Department were published in international scientific journals, with special reference to the Journal of the European Economic Association, European Economic Review, Journal of Human Resources, Economics Letters, Applied Economics, International Journal of Forecasting, Journal of Economic Integration, Economic Modelling and OPEC Review. The economists of Banco de Portugal presented their works at international scientific meetings, namely at the Annual Conferences of the European Economic Association, European Association of Labour 227 Report and Financial Statements Economists and Society for Economic Dynamics. Economists of Banco de Portugal continued to be members of the executive committees of several international scientific organisations, such as the European Economic Association and the European Association of Labour Economists. Banco de Portugal continued to ensure the representation in and the institutional reporting to the Eurosystem’s Committees and Working Groups on economic analysis and monetary policy issues. Reference should be made, in particular, to the Banco de Portugal’s participation in the Eurosystem’s spring and autumn projection exercises. In 2004 Banco de Portugal continued to cooperate with national bodies, such as the Ministry of Finance and the National Statistical Institute (INE), and international organisations, such as the European Commission, the International Monetary Fund, the Organisation for Economic Co-operation and Development, Eurostat and the Bank for International Settlements. In 2004 Banco de Portugal continued to promote the co-operation with Portuguese and foreign researchers, by hosting several conferences, seminars and providing staff training. In March Banco de Portugal organised the Second Conference on the “Portuguese economic development in the context of European integration”, where, following a public call for papers forwarded by Banco de Portugal to the Portuguese academia, Portuguese economists presented papers on fiscal policy and social security, functioning of the labour market, assessment of government programmes, and markets and development. In June 2004 Banco de Portugal hosted the Third Conference on Monetary Economics, which was organised by experts of the Economic Research Department, attended by Portuguese and foreign renowned economists and focusing on issues relating to several topics related to monetary policy. the new reporting system for MFI balance sheets and interest rates statistics, transposing into the national system the ECB statistical requirements laid down in Regulations ECB/2001/13 of 22 November and ECB/2001/18 of 20 December. As an example, reference should be made to the dissemination of the annual growth rates of domestic credit aggregates calculated as a measure of the relative change in financial transactions. Still within the scope of Monetary and Financial Statistics, mention should be made to the work initiated in early 2004 in association with the ECB, related to the future ECB Regulation aiming at defining an harmonised system of other financial intermediaries (excluding insurance corporations and pension funds) statistics. Concerning the Central Credit Register, its functioning improved significantly and the exhaustive coverage of liabilities for credit obtained from the resident financial system was ensured. This aspect represented an improvement of the service provided by the Central Credit Register to the financial system and facilitated the development of new procedures to enhance its use for statistical purposes, making it possible to obtain a significant set of additional details on credit granted by the financial system. CENTRAL CREDIT REGISTER Written and personal information Head-office, Oporto Branch and District Agencies 90000 80000 70000 60000 50000 40000 8.6. Statistics 30000 20000 In the field of Monetary and Financial Statistics, the improvements in Monetary Financial Institutions (MFI) statistics published by Banco de Portugal are worthy of note. The changes introduced were related to the implementation of 228 10000 0 Written information Atendimento escrito 2000 2001 Personal information Atendimento presencial 2002 2003 2004 Banco de Portugal | Annual Report | 2004 Report and Financial Statements As to the dissemination of information by the Central Credit Register, around 81,000 beneficiaries were personally informed (vis-à-vis 63,000 in 2003), corresponding to a daily average of 320 people. Within this scope, around 20,000 statements on the financial standing of contractors competing for public works contracts were issued in 2004 and approximately 15,000 written replies were given to requests submitted by individuals and firms. As regards the dissemination of statistics, 2004 was marked by the strict compliance with the reporting deadlines in the different domains – monetary and financial statistics, balance of payments and international investment position statistics, securities and exchange rate statistics, and national financial accounts statistics. 701 reports were made to international organisations (totalling 413,000 series), in particular to the ECB, Eurostat, IMF, OECD and BIS. Special reference should be made to the new layout of the Statistical Bulletin, which was released in January 2005, including additional data, particularly on securities and exchange rate statistics. Worthy of note is the publication for the first time of the CD-ROM edition of the Statistical Bulletin, in addition to the hard copy issue, and the respective dissemination in the Banco de Portugal’s website. Banco de Portugal continued to report quarterly to the Eurostat and the ECB the major financial operations carried out by the General Government, in compliance with the Regulation of the European Parliament and of the Council approved in March 2004. In addition, the Bank started to report regularly to the ECB quarterly balance of payments statistics with geographical breakdown and quarterly international investment position statistics. As a result of European Union enlargement on 1 May 2004, a significant number of new statistical series need to be reported to the ECB on a regular basis, corresponding to the geographical breakdown of data relating to the new Member States. Still within the scope of regular reporting to the ECB, new series started to be reported in 2004, fulfiling additional data requirements in the context of the Monetary Union financial accounts. Banco de Portugal | Annual Report | 2004 The close co-operation between the Bank and official entities within the framework of statistical production was pursued and reinforced in 2004, with the conclusion of two new protocols with the Direcção-Geral do Turismo (General Directorate of Tourism) and the National Statistical Institute. Such protocols aimed the collection of additional data in order to compile tourism statistics, and focused on two statistical operations, namely the survey on cross-border movement of travellers and the survey on international tourist expenditure. In the context of the compilation of the Portuguese national accounts, the joint work between the Bank and the National Statistical Institute was also worthy of note. The overall consistency of the data reported to Banco de Portugal within the scope of the different statistical production systems continued to be monitored in 2004. In this context, regular contacts were maintained with those responsible for the production of data within the financial institutions. Overall assessment reports were prepared and sent to the major financial groups, covering the quality of reported data on monetary and financial statistics, balance of payments statistics, securities statistics and central credit register statistics. This initiative has shown very satisfactory results with impacts on the improved consistency and quality of the statistics produced by Banco de Portugal in the various domains. In 2004, the BPnet system has consolidated its role as the financial institutions’ preferential mean for regular statistical reporting to Banco de Portugal. Approximately 99 per cent of the total volume of data reported is being communicated via this transmission mechanism. In the field of the activities associated with the Central Balance Sheet Data Office, nearly 23,000 non-financial corporations were surveyed, 16 per cent of which for the first time in 2004, with a response rate of approximately 67 per cent. Additionally, the processing of data collected from the Quarterly Survey to non-financial corporations continued, in co-operation with the National Statistical Institute. The quality control of the data supplied to the Central Balance Sheet Data Office, within the scope of annual and quarterly surveys, was subject to particular attention in 2004. In this field, and 229 Report and Financial Statements envisaging a future improvement in the processing of the accounting information received, particular interest was paid to the developments in the field of the XBRL language (eXtensible Business Reporting Language). 8.7. International Relations International relations are particularly relevant for Banco de Portugal’s activities and occur mainly with Community and other European institutions, as well as with the International Monetary Fund. One of the segments of these relationships is related to supervision, whose international activities are described in Chapter 8.1.6. Banco de Portugal is part of the European System of Central Banks (ESCB), which is composed of the European Central Bank (ECB) and the national central banks (NCBs) of EU Member States. Since Portugal is one of the Member States participating in the euro area, Banco de Portugal is also part of the Eurosystem, the system of central banks in the euro area. International activities in the context of the ESCB/ECB unfold through three channels: • the participation of the Governor of Banco de Portugal in the Governing Council of the ECB, the supreme decision-making body of the ESCB/ ECB. This body, pursuant to the Treaty establishing the European Community and the Statute of the ESCB/ECB, is responsible for adopting the guidelines and taking decisions to ensure the performance of the tasks entrusted to the ESCB. Governing Council decisions are usually adopted during the respective meetings. Twenty-three meetings were held in 2004, while an increasing number of decisions were taken by written procedures. • the participation of bank experts in the committees, working groups and other substructures, including different high-level groups, which, according to the respective mandates, contribute to the fulfilment of the statutory tasks of the ESCB/ECB. • at the domestic level, the support and preparatory work for the decision-making process of the Governor, as well as the decentralised implementation of the decisions taken. 230 These multiple actions involve the contribution of a large number of players in different areas and departments, conferring an international perspective to most activities of the Bank. In 2004, the monitoring and participation in all activities and decisions related to the basic tasks of the ESCB continued, namely in the field of monetary policy, foreign exchange operations, reserve management and the smooth operation of payment systems, as well as of other complementary responsibilities or contributions to the performance of such tasks, particularly within the scope of supervision, international representation, statistics and advisory functions. In terms of the international activities carried on in 2004, focus should be given to the formal consultation of the ECB, in line with Article 48 of the Treaty on the European Union, regarding the European Constitution project. This consultation focused on institutional and other relevant aspects of the monetary field. The ECB conducted the consultation procedure with significant involvement of the NCBs and in particular of the respective governors. In the end, the maintenance of ECB specificity within the EU institutional framework was ensured, confirming its total independence and its primary objective of maintaining price stability. The Treaty establishing a Constitution for Europe, the European Constitution, was signed in Rome, in October 2004. The European Constitution must be ratified by the Member States, according to the respective national procedures, and is expected to enter into force in November 2006. On 1 May 2004, ten countries joined the European Union: the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia. This enlargement implied long preparatory work, particularly at ESCB level, which now includes also the NCBs of these Member States, while the respective Governors are members of the General Council of the ECB. The General Council of the ECB, which is composed of the President and the Vice-President of the ECB and the Governors of the NCBs of the ESCB, held five meetings in 2004 and, pursuant to statutory provisions, took over the functions previously assigned to the European Banco de Portugal | Annual Report | 2004 Report and Financial Statements Monetary Institute (EMI), since there are still some Member States – such as the new member countries – which do not participate in the euro area. Within the scope of EU accession, the Governing Council of the ECB adopted a number of resolutions related to the decision-making process and to the functioning of the committees and working groups, as well as to the technical and operational preparatory work necessary to the functioning of the ESCB, involving, inter alia, payment and settlement systems, and technological and statistical infra-structures. The ECB monitored more closely the economies of the acceding countries, with special focus on the analysis of the economic and legal aspects of convergence, crucial for future participation in the euro area. Banco de Portugal was also involved in these tasks, in particular via its participation in different committees and working groups of the System. Participation in the Governing Council of the ECB also implies that the Governor monitors and intervenes in major issues of economic policy in the EU, such as debates on the Stability and Growth Pact or the dialogue on policy coordination. In the future, this action may be reinforced as a result of the new framework for the operation of the Eurogroup, composed of the finance ministers of the euro area and of the Commissioner for Economic and Monetary Affairs (European Commission), in whose meetings the ECB has been invited to participate, represented by the respective President. Since some international activities of the Bank occur within the framework of ESCB/ECB and via the ECB, it is worth mentioning in more detail the role played by the International Relations Committee. This Committee, according to its mandate, assists in the fulfilment of the ESCB/ ECB’s tasks in terms of international co-operation, including within the scope of the EU. Therefore, its agenda covers the preparation and discussion of the ESCB’s positions on issues relating, inter alia, to the architecture and operation of the international monetary system and, in general, to the monitoring of world economy and financial markets, with particular focus on major economies and on systemically important countries, including the surveillance Banco de Portugal | Annual Report | 2004 of macroeconomic policies by international institutions. ECB participation in the Annual and Spring meetings of the International Monetary Fund/ World Bank is based on this work. As far as the new Member States are concerned, the International Relations Committee assumed particular responsibilities in monitoring the accession process, and prepared a high-level seminar with these countries, held in Paris, in March 2004. In turn, the regular analysis and reporting on the Exchange Rate Mechanism II and the international role of the euro were pursued, as well as the tasks regarding cooperation with countries outside the EU. The International Relations Committee was therefore an additional forum for a number of activities carried on by the Bank within the scope of co-operation, presented in more detail below. In 2004, the Bank pursued its task concerning information on the activities of the ECB and the ESCB. In addition to posting on its website a number of public documents, it also ensured the translation into Portuguese and distribution of press releases, the 2nd edition of the publication The Monetary Policy of the ECB, as well as other regular publications, such as the 2003 Annual Report, the 2004 Convergence Report and the Monthly Bulletins (the latter with a new layout since January 2004). In its field of competence, Banco de Portugal is also represented in a number of other bodies and working groups within the framework of the EU, in particular the Economic and Financial Committee (EFC), the Economic Policy Committee (EPC) and the EUROSTAT, contributing also technically, in terms of external relations, to satisfying several requests from national authorities. The regular participation of Banco de Portugal in the activities of the Economic and Financial Committee continued to be worthy of note, given the important role played by this committee in the preparation – in the areas envisaged in the Treaty – of the work and decisions of the ECOFIN Council and in the monitoring of the economic and financial situation of the Member States and the Community. The Governor participated in the Informal Ecofin meetings held in April and September 2004. 231 Report and Financial Statements Similarly to previous years, a substantial share of EFC’s activities, in the framework of the Stability and Growth Pact, was associated with regular multilateral surveillance, the examination of the updated Stability and Convergence Programmes and the preparation and monitoring of decisions related to the implementation of the Excessive Deficit Procedure (the EFC intervened, inter alia, in the preparation of the abrogation, in May, of the Council Decision on the existence of an excessive deficit in Portugal). In this regard, although these issues were addressed in restricted composition – in the wake of the reorganisation of the Committee in 2003 – NCB representatives participated in every discussion involving the respective countries. In this respect, attention focused on several proposals concerning the reform of the Stability and Growth Pact, which is expected to be concluded in 2005. The EFC also continued to contribute to the update of the Broad Economic Policy Guidelines of the Member States and the Community and to the monitoring of the respective implementation. After the entry of the ten new Member States into the EU, the EFC has pursued the regular macro-financial dialogue with the present candidate countries (Bulgaria, Romania, Turkey and Croatia), with particular emphasis on fiscal issues and structural reforms. Issues related to financial markets and services were also the object of particular attention of the Committee, particularly through the organisation of two Financial Stability Tables. The EFC has also followed the work related to the mid-term review of the Lisbon strategy. In line with a strengthened co-ordination of positions at the international level and within the scope of the Community’s external representation, special emphasis continued to be placed on the preparation of the EU Presidency’s participation in several fora (in particular the IMF/World Bank meetings) and on the preparation of European common understandings on relevant issues of the international financial agenda. The importance of these subjects was reflected in the agenda of the EFC sub-committee on IMF and Related Issues (in which the Bank also participates). Worthy of note is also the transformation of the working group on EU government bonds (with 232 the participation of Banco de Portugal) into a Sub-Committee of the EFC (EFC Sub-Committee on EU Government Bonds and Bills Markets). With regard to the OECD, the Bank carried on its activities at different levels, participating in meetings, namely of the Economic Policy Committee and the respective working groups and, especially, integrating the national delegation of OECD’s annual review of the Portuguese economy. Relations with the IMF is another important field of the Bank’s international activity. In fact, in addition to the contributions through the participation in the International Relations Committee and the EFC on the preparation of positions concerning international co-operation, Banco de Portugal, in its capacity as fiscal agent, analyses the agendas and the work of the IMF, taking a direct and active interest in all fields. In particular, as usual, a high-level representation of Banco de Portugal participated in the spring and autumn meetings of the International Monetary and Financial Committee and the IMF Annual Meeting (held in Washington in October 2004). The agenda of these meetings included important topics, such as the world economy and financial markets developments, enhancing the effectiveness of IMF surveillance and crisis prevention, and the role of the Fund in supporting low-income countries. In this regard, discussions were held on the implementation of macroeconomic stabilisation policies and on the pursuit of the reforms needed for sustainable growth and for the elimination of poverty. Debt sustainability and its interaction with conditionality in the Fund’s programmes and the role of the IMF concerning the Millennium Development Goals were some of the other issues discussed. In these meetings, progress reports on the Fund’s initiatives for the resolution of crisis were also reviewed – with particular focus on the increasing use of collective action clauses in the issuance of sovereign debt and on developments concerning the adoption of a creditors/debtors code of conduct. The abovementioned progress reports also evaluated issues related to the revision of quotas and the voice of developing countries and Banco de Portugal | Annual Report | 2004 Report and Financial Statements countries in transition as well as the activities of the Independent Evaluation Office (responsible for the evaluation of IMF performance in its different fields of activity). The quality of IMF’s surveillance was also widely discussed, with spillover effects both at the multilateral level, reflected in the World Economic Outlook and the Global Financial Stability Report, and at the bilateral level, with particular impact on Article IV consultations. As to the latter, it was decided that a strategic objective should be adopted for every consultation, ensuring the coverage of key areas related to the external sustainability and the vulnerability of the balance of payments, as well as to creating conditions for sustainable growth. The exercises should take into account the regional or multilateral framework and should be supplemented by specialised approaches, particularly within the framework of the programmes for the assessment of financial systems (the so-called Financial Sector Assessment Program). The involvement of national authorities and the decision to disclose the reports prepared by the missions were also highlighted. In the context of the preparation of the IMF/ WB Annual Meeting, the 14th Lisbon Meeting with the Delegations of Portuguese-Speaking African Countries (PALOPs) and East Timor was held in Lisbon in September. In this meeting, the IMF’s and WB’s agendas were also discussed from the perspective of these countries. After participating in a module on fiscal transparency of a ROSC Report (Report on the Observance of Standards and Codes) in 2003, Portugal invited the IMF to prepare a FSAP for Portugal, which is expected to take place in 2006. In July 2004, an IMF mission paid an interim visit to Portugal, under Article IV, during which the financial sector developments and economic prospects for Portugal were discussed. The Bank for International Settlements (BIS) is also highly relevant in international financial relations. Banco de Portugal, as shareholder of the BIS, was represented by the Governor in the 74th General Meeting, held in Basel in June 2004. The central bank governors and banking supervisors of the G10 concluded the Basel II Framework in the BIS head-office, in June 2004. Banco de Portugal | Annual Report | 2004 The new Framework provides a tool for risk management and will be used by banks and supervisory authorities to assess the adequacy of capital. Banco de Portugal monitored this process closely, also with the co-operation of the financial sector and other supervisory authorities, and through its participation in the ECB. In the context of its relations with BIS, the Bank continued to participate in the information exchange network on issues related to central bank governance, and to co-operate in the field of statistics. At a bilateral level, the main counterparts of the international relations of the Bank in 2004 were other central banks, in particular of the EU, Portuguese-Speaking African Countries, East Timor and EU acceding countries. The co-operation plan yearly agreed with central banks of the PALOPs and East Timor included initiatives such as technical assistance, training courses and seminars on issues related to central bank activities, round tables and meetings, as well as visits and traineeships at Banco de Portugal. In 2004, technical assistance provided by the Bank involved chiefly statistics, accounting, monetary policy, auditing, legal advice and currency issuance. Upon request of the IMF, the Bank co-operated in preparatory works to support the compilation of balance of payments and international investment position statistics in S. Tomé and Príncipe and participated in the diagnosis and evaluation of the data collection system in the same areas in Cape Verde. The Bank participated also in two IMF missions in S. Tomé and Príncipe, reviewing the monetary policy and liquidity management instruments and contributing to the development of the interbank money market in that country. Banco de Portugal continued to participate in the Exchange Rate Co-operation Agreement Commission (COMACC) with Cape Verde and in the corresponding Macroeconomic Monitoring Unit of this agreement, which was signed between the Portuguese and Cape Verdean Governments in 1998. It continued to manage the Cape Verde Stabilisation Trust Fund, established as a back-up to the conversion of the domestic debt of the Cape Verdean State, in its capacity as external manager mandated by the Cape Verdean authorities. 233 Report and Financial Statements In co-operation with the IMF Statistics Department, the Bank organised a course on Monetary and Financial Statistics, held in Lisbon from 6 to 23 June, with the participation of 27 trainees of central banks and national statistical offices of the PALOPs and East Timor. The Bank ensured also the organisation of three courses: Fiscal Management in Luanda, Conceptual Approach to Payment Systems in Bissau, and Central Bank System of Accounts in Maputo. The main event of the "round tables/meetings" programme was the 14th Lisbon Meeting with the Delegations of the PALOPs and East Timor to the IMF/WB Annual Meeting, on the following topic: Millennium Development Objectives and NEPAD (New Partnership for Africa’s Development). Another important event was the 1st Governor Meeting in Cape Verde. The major point in the Agenda was the exchange of experiences on the conduct of monetary policy in countries represented. Within the scope of this Meeting, a Conference was held, open to civil society, on the theme: Portuguese economy vis-à-vis the euro, whose speaker was the Governor of Banco de Portugal. Another relevant round table was held in Lisbon on a number of supervision-related issues, in particular, Institutional Organisation for the Regulation and Supervision of Financial Systems, non-Banking Financial Corporations and Microfinance, and International Accounting Standards (IAS) in Banking Supervision. Other meetings were held this year, such as the 10th Meeting of Legal Experts in Lisbon, the VI Forum of Information and Communication Technologies and Systems of the Portuguese-Speaking Community in Maputo, and the 9th Meeting of Human Resources Managers in S. Tomé. The Bank has also carried on co-operation programmes with central banks of emerging economies and other low-income countries. Within the scope of this programme and in the field of bilateral initiatives, there was again predominance, as in previous years, of activities almost exclusively intended for EU candidate countries. Visits to/training periods in the Bank of delegations from some central banks of these countries covered chiefly areas such as economic research, statistics, supervision, payment systems, auditing and processes related to the adoption of the euro. Worthy of note was the visit 234 in July to different Departments of the Bank of a delegation from the State Administration of Foreign Exchange of the People’s Bank of China. At a multilateral level, most initiatives in 2004 refer to workshops/seminars carried out within the scope of the International Relations Committee of the ECB. As regards the activity of the Task Force on Central Bank Co-operation, its major objective was to report co-operation activities with central banks of Eurosystem’s neighbouring countries, and to analyse requests from these Central Banks in terms of co-operation. Against this background, the Bank participated, as previously mentioned, in the Paris Seminar, open to all acceding countries, chiefly covering monetary policy and exchange rate-related subjects as well as issues related to the operation of the Exchange Rate Mechanism II and to fiscal discipline in the context of the Stability and Growth Pact. As regards activities carried on by the International Relations Committee with Mediterranean countries (Algeria, Cyprus, Egypt, Israel, Jordan, Lebanon, Malta, Morocco, Palestinian Monetary Authority, Syria, Tunisia and Turkey), the Bank participated also in the Seminar with the central banks of those countries under the subjects: Economic Integration and Exchange Rate Policy and The Banking and Financial Sectors in Mediterranean Countries. A second edition of this seminar of the Eurosystem with Mediterranean countries has already been scheduled for 2005. It will cover the economic and financial relations between the euro area and Mediterranean countries, the development of monetary and exchange rate policy and of the financial sector in the Mediterranean region, and issues related to central bank "governance". The preparatory workshop for this Seminar was held in Frankfurt in September 2004, and had the participation of Banco de Portugal. A Seminar was held with the Central Bank of Russia with a view to deepening the relations with that institution, which provided an opportunity for the exchange of opinions on relevant issues of economic policy, in particular on monetary policy in the euro area and in Russia. The Bank participated also in the Second High-Level Seminar of the Eurosystem with Latin American Central Banks and organised the respective preparatory workshop in Lisbon, Banco de Portugal | Annual Report | 2004 Report and Financial Statements under the subject Constraints for the conduct of monetary and exchange rates policies arising from debt vulnerabilities. Finally, another Seminar was organised within the statistics area with the National Bank of Romania, within the scope of the European Union PHARE project, held in Bucharest. The Bank participated also in the TACIS programme (Technical Assistance to the Community of Independent States) of the European Union with the Central Bank of Russia within the supervision area, which included a course held in Moscow on Credit Risk/Credit Portfolio Inspection. 8.8. Financial Activities 8.8.1. Management of the Banco de Portugal’s own investment assets At the end of 2004, total own investment assets managed by the Banco de Portugal were valued at €18 504 billion, compared with €18 613 billion at the end of 2003 (0.6%). The value of the euro and foreign currency portfolio reached €13 725 billion (against €13 120 billion at the end of the previous year). The value of the gold portfolio reached €4 779 billion at the end of 2004 (compared with €5 493 billion in 2003). Similarly to the previous two years, Banco de Portugal sold around 55 tons of gold in the course of 2004, under the “Central Bank Gold Agreement”, with the purpose of diversifying the composition of its own investment assets. With the entry into force in July of the new management and control information system of investment assets and making use of the new functionalities available, a broad revision was made to the Guidelines of the Management of the Banco de Portugal’s own investment assets. The strategic benchmark was revised twice, in the course of 2004, always with the aim of maximising profitability, while complying with the risk and liquidity rules. 8.8.2. Financial relations with the State The settlement account of the DirectorateGeneral of the Treasury, which centralises all financial movements between the Banco de Portugal and the Treasury posted a credit balance of € 5.95 on 31 December 2004. Banco de Portugal | Annual Report | 2004 In addition to the above-mentioned account, the central government holds a special account with the Banco de Portugal, the so-called "Public Treasury – investment account – available resources", which is remunerated according to specific rules. On 31 December 2004 this account posted a credit balance of €5.00. 8.9. Exchange Authority As the foreign exchange authority of the Portuguese Republic, whose powers are provided for in its Organic Law and in Article 8 of Decree-Law No 295/2003 of 21 November, Banco de Portugal registered, in 2004, thirty four manual foreign exchange contracts signed between credit institutions and financial companies and non-financial companies. On the other hand, in terms of proceedings relating to breaches of foreign exchange regulations and in the use of the powers entrusted to it by Articles 37 and 42 of the above-mentioned Decree-Law, Banco de Portugal started two new proceedings and inspected an entity indicted for the unlawful carrying on of foreign exchange activities; as regards another proceeding, the Bank decided to apply a fine to the entity in question, which made the voluntary payment. With respect to four proceedings relating to breaches of foreign exchange regulations compiled under the terms of Decree-Law No 13/ 90 of 8 January, revoked by the above-mentioned Decree-Law No 295/2003, the accused appealed against the decision of the Ministry of Finance. Of these, one has already been decided by Court, which confirmed the breach of regulations and reduced the amount of the fine, due to the application of the most favourable law principle. The others are pending decision by the Court. 8.10. Internal organisation and management 8.10.1. Human resources The Human Resources Management and Development Department was engaged in several activities and initiatives in 2004, among which the following should be mentioned: 235 Report and Financial Statements • Structural reorganisation of the Administrative Services Department (DSA), the Legal Services Department (DJU), the Human Resources Management and Development Department (DRH), the Treasury and Issue Department (DET), and setting up of a support unit to the Deposit Guarantee Fund; • Development of recruitment and selection processes both internal and external, in particular of professional staff, as well as pursuance of a policy of co-operation with the academic milieu, by means of remunerated traineeships for recent graduates. • Pursuance of measures for the simplification and fine-tuning of the Bank’s compensation scheme. • Development of a set of institutional training programmes, encompassing the development of technical, specialised and behavioural competences, aiming at improving the level of knowledge and performance of human resources. • Participation of top and middle managers as well as of other senior officials in joint training actions for the national central banks of the European Union (in the field of management, leadership and integration in the European System of Central Banks). In this context, Banco de Portugal organised the course "Heading for Leadership". • Furtherance of negotiations aimed at the signing of the so-called "Acordo de Empresa" (Works Council Agreement), with the banking sector trade unions of the north, centre, south and the islands. • Participation in the preparation of the Code of Conduct of Banco de Portugal. • Pursuance of bilateral co-operation actions with the central banks of Portuguese-speaking African Countries (PALOP) and other Portuguese-speaking countries regarding the training of specialist staff, internships in the Banco de Portugal, as well as expert advisory actions in Human Resources Management to staff members of the central banks of Mozambique and Angola. 236 Staffing In 2004 the number of staff of the Banco de Portugal fell from 1,786 to 1,736, accounting for a 2.8 per cent decrease. In 2004 the Bank recruited 18 (professional) staff. There were 62 retirements (5 disability retirements, 6 normal age retirements, 10 negotiated early retirements and 41 regularly agreed retirements). There were 5 terminations of labour contracts and 1 decease. Of total staff, 980 were male and 756 female. 1,490 worked at the head office, 135 at the Oporto branch and 111 at the Regional Delegations and Agencies. The table below shows the development pattern of the Bank’s staff over the past five years: STAFF DEVELOPMENT PATTERN Staff 2000 2001 2002 2003 2004 Male 1,084 1,062 1,034 1,021 980 748 752 760 765 756 1,832 1,814 1,794 1,786 1,736 Female Total Among the 1,736 employees, there were 44 Heads and Deputy Heads of Department, 66 managerial staff, 674 professional staff, 93 specialist staff and 549 administrative staff. The remaining 310 were managers and support staff belonging to Groups II, III and IV. Categories G. I G. II G. III G. IV 9 19 7 - 53 178 44 1 426 62 197 51 Heads of Department 44 Managerial staff 66 Professional staff 674 Specialist staff Administrative staff Support staff Total 93 549 Banco de Portugal | Annual Report | 2004 Report and Financial Statements Group I, comprising 1,426 employees, represents 82.1 per cent of total staff, followed by Group III with 197 employees, representing 11.3 per cent of total staff. Over the past five years, the development pattern of Contractual Groups was as follows: Staff 2000 2001 2002 2003 2004 Group I 1,502 1,486 1,475 1,470 1,426 Group II 67 66 65 63 62 Group III 207 207 202 201 197 Group IV 56 55 52 52 51 1,832 1,814 1,794 1,786 1,736 Total Seniority With regard to seniority, and as shown in the following table, the largest group of staff (526) has served the Bank for 21/25 years, followed by the group who has served the Bank for more than 25 years, with 473 employees. There are 446 employees who have served the Bank for up to 15 years, accounting for 25.7 per cent of total staff, against 1,290 employees (74.3 per cent) who have served the Bank for more than 15 years. The average seniority in the Bank is 20.5 years, reflecting a slight increase from 2003 (20 years). SENIORITY DEVELOPMENT PATTERN Age groups Seniority The breakdown by age groups shows that the group with the highest number of staff is the 46/55 age group (766), followed by the 36/45 age group (408). There are 267 employees aged below 36, corresponding to 15.4 per cent of total staff. 61 employees are over 61, corresponding to 3.5 per cent. On 31 December 2004, the average age group was 45.3 for women, 47.5 for men and 46.6 for total staff, reflecting a slight increase from the previous year (46.2 years). AGE GROUP DEVELOPMENT PATTERN Age group 2000 2001 2002 2003 2004 19/25 41 41 29 23 24 26/30 119 120 122 111 103 31/35 129 122 132 138 140 36/45 718 666 600 521 408 46/55 631 625 644 701 766 56/60 145 185 222 239 234 61/65 46 55 45 53 60 > 65 3 - - - 1 Total 1,832 1,814 1,794 1,786 1,736 Banco de Portugal | Annual Report | 2004 Up to 2 years 2000 2001 2002 2003 2004 63 68 73 83 71 3 to 5 136 108 60 68 73 6 to 10 149 158 171 168 174 11 to 15 216 151 150 136 136 16 to 20 572 585 564 411 291 21 to 25 254 277 303 435 526 > 25 437 462 463 497 473 Total 1,832 1,814 1,794 1,786 1,736 Level of education Taking into consideration the specific functions of the central bank and the number of its professional staff (674), it can be concluded that, on average, the level of education of the Bank’s staff is high. The 733 employees with a university degree (348 women and 385 men) correspond to 42.2 per cent of total staff. 237 Report and Financial Statements Level of education 2000 2001 2002 2003 2004 PhD 14 16 20 20 21 Master's degree 57 60 67 73 75 634 631 637 647 637 38 38 35 33 32 521 511 491 478 447 education 245 239 234 231 225 Elementary school 321 317 308 303 298 2 2 2 1 1 1,832 1,814 1,794 Graduation Bachelor's degree The average number of training hours per employee increased from 20.2 hours in 2003 to 27.7 hours in 2004. Over the same period, taking into account the 1,736 staff, the rate of participation stood at 72.7 per cent (compared with 61.1 per cent in 2003). Upper secondary education PROFESSIONAL TRAINING DEVELOPMENT PATTERN Lower secondary No grade Total 1,786 1,736 Training 2000 2001 2002 2003 2004 Participants 1,013 1,322 1,192 1,092 1,262 Hours 43,066 36,307 29,505.5 36,102.5 48,132.5 8.10.2. Pension Fund Retirees and pensioners In 2004 there were 1,729 staff in retirement (41 more than in 2003), corresponding to 99.6 per cent of the active staff (1,736). The number of pensioners increased from 476 (in 2003) to 480 (in 2004), accounting for 27.6 per cent of the Bank’s active staff. RETIREES AND PENSIONERS DEVELOPMENT PATTERN Development Pattern 2000 2001 2002 2003 2004 Retirees 1,678 1,683 1,689 1,688 1,729 474 473 491 476 480 Pensioners Professional training During the year under review, 1,262 employees took part in internal and external (in Portugal and abroad) training activities, totalling 3,164 participations, 2,727 of which were internal and 437 external. Of these 282 were in the country and 155 abroad. There were 557 training actions, corresponding to 48,132.5 hours (12,030 hours more than in 2003), of which 37,172.5 hours at internal level and 6,625 hours at external level. 238 The Pension Fund of the Banco de Portugal, set up in 1988, is composed of autonomous assets, exclusively earmarked for the fulfilment of the Banco de Portugal’s commitment to pay retirement, disability and survivors pensions. It is a closed pension fund, operating a defined benefit scheme, and exists instead of the first pillar of social protection. Sociedade Gestora do Fundo de Pensões do Banco de Portugal, S.A. (Banco de Portugal Pension Fund Management Company) is responsible for managing the Pension Fund and actuarial valuations required to calculate liabilities relating to retirement and survivors pensions. 97.7 per cent of the capital of this management company is held by Banco de Portugal and its staff members are employees of the Bank covered by a secondment arrangement. In accordance with the provisions laid down in Notice of the Banco de Portugal No. 12/2001 of 23 November, actuarial methods as well as the main calculation assumptions are explained in detail in the note on retirement and survivors pensions, in the Financial Statements section of this Annual Report. Market rates are used for the discount of future cash flows related to the Pension Fund’s liabilities. This methodology is based on the assumption that the actual value of liabilities must represent, at each moment, the capital that should be invested to meet future payments. The adoption of this principle makes it possible to use an assets investment policy that largely reflects the time structure of liabilities. Banco de Portugal | Annual Report | 2004 Report and Financial Statements ASSETS AND LIABILITIES OF THE PENSION FUND 1200 1000 EUR million 800 600 400 200 0 2000 2001 2002 Pension Fund value 2003 2004 Past service liabilities The high maturity of the population covered by the Pension Fund of the Banco de Portugal, in which the number of beneficiaries is higher than the number of active participants (a ratio of 0.79 of active employees in relation to retired employees and pensioners at the end of 2004) and the resulting weight in the total of liabilities relating to pensions to be paid (52.7 per cent) strongly condition the assets management of the Fund. The asset management policy is aimed at maximising the profitability of the Fund’s assets, while sticking to a conservative approach both as to the adequate degree of liquidity to meet payment liabilities and to the limits on market and counterparty risks on the value of the assets comprising the fund. On 31 December 2004 the assets of the Pension Fund of the Banco de Portugal amounted to €1,012.2 million, up by €71.6 million from a year earlier. Total past service liabilities amounted to €1,040.9 million, €548.95 million of which are liabilities relating to retirees/pensioners and €491.96 million to past service liabilities of active employees. In 2004 the increase in past service liabilities amounted to €70.95 million. In the course of the year, €17.6 million of regular contributions were made of which €1.5 million corresponded to contributions by the employees and €16.1 million to contributions made by the Banco de Portugal. On 31 December 2004 the Pension Fund recorded an overall funding level of 97.2 per cent, ensuring a coverage of 100 per cent of liabilities with pension payments and a coverage of past service liabilities higher than 95 per cent (minimum established in Notice of the Banco de Portugal No. 12/2001 of 23 November). With respect to the activity of Sociedade Gestora do Fundo de Pensões do Banco de Portugal, a joint project with Banco de Portugal was concluded, leading to the implementation of a new assets management information system. This system covers different operational areas, enabling a significant increase in efficiency and a high reduction of the operational risk. Improvements were also introduced in the actuarial assessment model and in the adjustment of some calculation assumptions, namely in terms of the methodology regarding the setting of the discount rate and the growth rates of pensions and wages. FINANCIAL STANDING OF THE PENSION FUND AS AT THE END OF THE YEAR EUR thousands Change % 2002 2003 2004 Pension Fund value 898,722 940,602 1,012,217 Past service liabilities 2003-04 7.6 930,787 969,954 1,040,909 7.3 Beneficiaries (retired staff/pensioners) 490,462 497,055 548,951 10.4 Participants (employees) 440,325 472,899 491,958 4.0 96.6% 97.0% 97.2% Funding level Banco de Portugal | Annual Report | 2004 239 Report and Financial Statements 8.10.3. Organisation and information technology 2004 was marked by the stabilisation and consolidation of the BPnet system, which had been designed and developed in 2002 and launched in early 2003. At the end of the year, 163 institutions had adhered to the system, with a total of 1,659 users subscribing 35 different services. At the beginning of the year, a Contents Management solution was selected for both BPnet and Intranet of Banco de Portugal, as well as for the Bank’s website. Its implementation process started in 2004 and is due to be completed in the first quarter of 2005. Along the same strategic orientation, but at the Bank’s internal level, the development of GISSEC (cooperative work environment system for electronic document management and workflow processes) was stepped up in terms of security and performance. In 2004 the system operated smoothly, although several releases were made available to the Bank’s users. Aiming at the necessary evolution of this important system in the medium to long term, and taking the technological innovation into consideration, its main features were clearly and explicitly specified, as well as the guidelines for the most appropriate architecture considering the Banks’ needs. This step will be instrumental in the identification in the course of 2005 of the future technological environment supporting the Bank’s electronic document system. In 2004 the TARGET/SPGT availability was 99.86 per cent, as four incidents occurred in March, August and November (lasting from 22 to 65 minutes). Nevertheless, since the launch of TARGET (1999), Portugal is ranked third within the ESCB, with a cumulative availability index of 99.88 per cent. The SIGRA project – information system for the management of reserves and assets – was completed in July. It comprises the integration of the supporting computer facilities for the front-, middle- and back-office of the Market and Reserve Management Department, as well as the treatment of the relevant data for accounting purposes and their integration in SIIF – financial information integrated system. The live operation of the SIGRA system was remarkably smooth in the second half of the year. 240 With regard to the Business Continuity Plan / Disaster Recovery Plan (PCN / PRCC), Stages I and II were concluded in April and July respectively, as well as most of Stage III (conclusion foreseen for January 2005). Each stage was completed with a disaster simulation, followed by the triggering of the recovery mechanisms of computer environments and critical activity areas of the Bank. Apart from minor, practically irrelevant incidents, these actions were a success. Given the results obtained in Stage I and II, the Bank now has a fully effective continuity solution to support, inter alia, the payment systems. Stage III of the PCN/ PRCC (simulation to be made in January 2005) covers a significant number of other business areas of the Bank and Stage IV (conclusion foreseen for April 2005) will make a continuity solution available for the markets area. In view of the technological architecture chosen by the Bank, the implementation of PCN/PRCC enabled a deep consolidation of its IT infrastructures. The Bank currently has available an infrastructure platform with a high degree of operational resilience, even considering purely technical incidents, given its features of operational parallelism (or quasi-parallelism, in areas where there are no effective solutions available in the market in technical and economic terms). Therefore, the considerable effort made in this project, both in financial terms and in terms of the work developed (over sixteen thousand man-hours in 2004, considering only internal resources of the Organisation and Information Systems and Technology Department - DOI) was largely justified and added significant value to the Bank’s systems. The development and maintenance of IT systems involved 63,471 man hours in 2004, of which around 31 per cent were dedicated to horizontal projects (i.e. aimed at the whole Bank, as opposed to specific business areas). Of the total effort, 51.8 per cent envisaged the development of specific projects, 26.4 per cent the maintenance and support of live applications, 5.4 per cent the organisation and methods (namely organisational and functional restructuring processes of some of the Bank’s departments, analysis of solutions for the electronic document archive, printing and Banco de Portugal | Annual Report | 2004 Report and Financial Statements reproduction policy, redesign of the Bank’s Press Magazine, technical co-ordination of the Internal System for Written Communication, analysis of administrative equipments and rationalisation of printed forms) and 16.4 per cent other activities (SPAI – Information Sharing System, consolidation of development platforms and associated methods, support to the planning process of the Information Systems and Technologies Committee, specialised training). It should be noted that the figure for "organisation and methods" does not include the activity developed within the scope of IT projects, which is always the main intervention area of DOI in the restructuring and optimisation of organisational and administrative processes. Finally, in the field of the co operation with the central banks of the Portuguese speaking countries, reference should be made to the participation of the Bank, through DOI, in the 6th Forum for Information Systems and Technologies, held in April, in Mozambique. 8.10.4. Information and documentation The Documentation, Printed Publications and Museum Area continued to co operate with the central banks of the Portuguese speaking African countries in the field of archive techniques, library, documentation and museum, having conducted an advisory mission to Banco de Cabo Verde for the development of its Documentation Division and having received, in Lisbon, trainees from the central banks of Angola, Mozambique and S. Tomé and Príncipe. At European level, it continued to co operate actively with the European Association for Financial and Banking History, having organised in Portugal a workshop on Central Bank Archives, in which participated representatives of thirty kindred institutions. The Library of the Bank continued to welcome both external and internal users and to use the latest electronic means. Users may have access to both the Bank’s extensive library resources and to relevant external sources in the national and international economic and financial fields. The Printed Publications Service currently coordinates the design of the Bank’s communication and is responsible for the printed and on-line Banco de Portugal | Annual Report | 2004 publications of the Bank. It has recently redesigned the Bank’s publications and this modernisation will be extended to all graphical supports, computer applications and website. The Archive continued to provide support to external research on the Portuguese banking and financial history and to meet the internal requests. It carried on the study and proposal of regulations for the management of the Bank’s electronic archive. The Museum continued to welcome a high number of visitors from schools and other entities that requested guided tours to the exhibition on the history of money in Portugal. A virtual visit of the Bank’s museum is currently under preparation. 8.10.5. Legal services In 2004 the legal activity of the Bank continued to be chiefly developed in two main areas: consultation and legal studies, on the one hand, and court appearances and contracts, on the other. In the area of consultation and legal studies, work continued to be mostly developed within the framework of the European System of Central Banks. This area was formally emphasized with the organisational restructuring of the Legal Services Department in 2004. The legal support related to the direct participation in the ESCB took place mainly in the Legal Committee (LEGCO) and in the respective working group, FLEX, involving the permanent analysis of technical and legal issues, as well as around 1.5 travels abroad per month. In addition, legal advice was provided to both the Board and other Departments of the Bank. The legal support of the Bank’s activities concerned, inter alia, the regulation and supervision of financial activity, the system governing the issue and circulation of banknotes and coins and other means of payment, external financial operations, the taxation of financial institutions and products, and economic criminality. The Bank has also co operated in several ways with Portuguese official entities, namely in the analysis of Community legislation under preparation and/or in its transposition into the 241 Report and Financial Statements national legislation – notably regarding the so called financial collateral arrangements, payment systems, European order for payment procedure and European Company Statute – and issued opinions on matters related to ongoing legal proceedings in the European Court of Justice. As in previous years, the Bank continued to ensure the co-ordination of the Portuguese Delegation in the Financial Action Task Force (FATF). Within its scope, the Brazilian prevention system against money laundering and terrorism financing was evaluated. The Bank also participated in the Working Group on Bribery in International Business Transactions (OECD), notably taking part in the team responsible for the evaluation of Greece. The Bank’s intervention continued to be co ordinated with a view to implementing the international financing penalties related to terrorism financing, in co operation with the Ministries of Finance (DGAERI) and Foreign Affairs (DGAM). As a whole, these activities involved, in addition to the advice provided on a regular basis, the technical participation in meetings held abroad (on average more than one per month). In the course of the 2004, as in the previous year, over five hundred verbal and written opinions were issued on the consultation and legal studies area. As far as court appearances and contracts are concerned, activity focused notably on the preparation, revision and conclusion of contracts with external entities and Bank’s employees. The Department ensured the court appearance on the Bank’s behalf, either directly or through the monitoring of cases where the legal representation has been entrusted to external lawyers. These legal proceedings, 19 of which were initiated in 2004, were related to breaches of regulations and administrative law, regarding notably banking supervision and civil and labour matters. It should be noted that from total legal proceedings – i.e. those initiated by or against the Bank and interventions in third parties’ lawsuits – 64 were pending at the end of the year (against 75 at the end of 2003). The Bank continued to promote co operation and exchange initiatives with national and foreign legal authorities. In this area, in November 242 the Bank hosted a seminar on legal and banking matters, with the participation of academics and lawyers and especially oriented to the banking community. The seminar focused on issues related to collateral contracts, the respective legislative innovations approved a few months earlier, and the recent jurisprudential developments. Within the framework of the international cooperation, the Bank held and hosted in April, for two days, the 10th Encounter of Lusophone Banking Jurists – previously held in several African and Brazilian capitals and twice in Lisbon – which assembled around twenty jurists to discuss previously selected subjects. Moreover, the Department continued to co operate with the monetary authority of East Timor, completing the draft project of the organic law of the future central bank of this country. By request of Escola Superior de Polícia Judiciária e Ciências Criminais (School of Police and Criminal Sciences), the Bank also co operated in the organisation and lectured in a senior management course for the staff of the countries that have recently joined the European Union and of North African countries. 8.10.6. Internal audit The internal audit function of Banco de Portugal is independent from the other services and units of the Bank. Its main responsibilities are to ensure the effectiveness, operability and security of its services, processes, activities and operations. The performance of this function helps the Bank fulfil its objectives at various levels, by using a systematic and disciplined way to assess and improve the effectiveness in the risk management, internal control and governance fields. Although all activity areas of the Bank may be independently assessed, the audit function focuses mainly on activities, processes and systems that, in any given period, imply greater potential risk, in order to prevent and foresee risks and problems inherent to the complexity and fast changing environment that characterise the purpose and context of the activity of Banco de Portugal. In operational terms, the annual activity in the field of internal audit consists in the Banco de Portugal | Annual Report | 2004 Report and Financial Statements implementation of a wide audit programme based on two plans approved by different decision-makers: (i) an internal audit programme approved by the Board of Directors and (ii) a programme defined at the level of the European System of Central Banks (ESCB), approved by the Governing Council of the European Central Bank. According to the generally agreed practices for the performance of this activity, the preparation of the approved audit programmes is based on formal and structured methodologies for the assessment of the risk of most operations, activities and systems of the Bank and of the ESCB/ Eurosystem. In addition to the programmed activity referred to above, the internal audit function also carries out special investigations and other works, at the request of the Board of Directors or of the Governing Council of the ECB. The operational objectives of programmed audit actions consist in giving a considerable degree of assurance to the members of the Board and to the management that the several services and systems of the Bank in the pursuance of their objectives and in the performance of their activities ensure: • The adequate identification and coverage of existing risks; • The existence and operation of effective and efficient internal control systems; • The reliability and integrity of the financial and operational information; • The effectiveness and efficiency of the operations; • The adequate security and safeguard of human, financial, technical and material assets; • The compliance with the applicable legal, regulatory and contractual rules and obligations. Within the framework of the programmes carried out in 2004, the core internal audit activity performed 42 audits, of which (i) 36 exclusively at domestic level and (ii) 6 at the level of common ESCB/Eurosystem systems. The table above shows the breakdown of the internal audit activity by the main intervention areas of the Bank: Banco de Portugal | Annual Report | 2004 INTERNAL AUDIT ACTIVITY Main intervention areas Market and reserve management systems and operations Audits 2 Currency issue and cash systems and operations at the Head-office, Oporto branch, regional delegations and agencies 9 Statistical production 2 Economic research 1 Payment systems and operations 3 Information technologies 5 Human resources management activities and administrative support 4 Legal services 1 International relations 1 Accounting and financial control 5 Direct support to the Board of Directors 3 Total 36 Within the scope of the audit activity programmed and carried out at the level of the ESCB and/or the Eurosystem, the Audit Department was actively involved in the planning, programming, implementation and reporting of 6 audits to the following common systems and/or activities: • ECB’s foreign reserve management; • Reserve requirements; • Eurosystem’s strategic stock; • Oversight of the TARGET system; • Monetary income; • Plan to develop the technological infrastructure of the ESCB-Net network. The reports issued by Banco de Portugal and the ESCB and/or the Eurosystem provided the management bodies with opinions, comments, information, assessments and, whenever necessary, recommendations intended to ensure the improvement of the activities, processes, systems, procedures and internal controls established. With respect to the latter, it should be noted that in the internal audit reports on the 243 Report and Financial Statements activity carried out in 2004, 68 recommendations were issued mainly intended to (i) reduce residual risks remaining in the audited areas, services and systems, (ii) promote the effectiveness, efficiency and security of the operations, processes and activities, and (iii) improve IT systems supporting the Bank’s activity. The Audit Department also monitored on a regular basis the actions and measures taken following its recommendations issued in previous years, in order to ensure that the risks are adequately assessed, overcome, or assumed, if necessary. In this context, in June 2004, a formal consultation was made to the several departments of the Bank, in order to assess and report to the Board action plans programmed or implemented following recommendations issued in the wake of the results of the audit programme in 2003. In the field of the overall activity entrusted to internal audit, the Bank developed several supplementary activities, primarily targeted at promoting or contributing to the enhancement of the risk analysis and internal control culture. In this area, the main activities were: • Systematic supply of information to the Board of Auditors of the Bank and undertaking of several assessments requested by this Board; • Technical support and reporting of information to Banco de Portugal and ECB external auditors; • Regular and systematic participation in the meetings and activities of the Internal Auditors Committee (IAC) and in the working groups that support the audit activity at the ESCB/ Eurosystem level; • Participation in several projects, commissions and working groups of the Bank, with special emphasis on the regular participation in the Committee for IT and in the Committee for Security Co-ordination of the Bank; 244 • Preparation of several papers on methodologies and risk management models and distribution and discussion of these papers with the Bank departments concerned, in order to promote a better risk management and control culture in the organisation as a whole; • Issue of opinions and supply of technical support to internal and external entities; • Publication, in November 2004, of another issue of Cadernos de Auditoria (Audit Booklets), on quality and innovation in internal audit and corporate ethics; • Traineeships and training in the field of the co-operation with Portuguese-speaking African countries and with central banks of Eastern European countries (Slovenia and Romania), to promote the development or improvement of the audit good practices and culture. 8.10.7. Buildings and technical facilities In 2004 and according to the strategic planning, a project to remodel the Ponta Delgada agency building was made and the redesign of the public information desk area of Edifício Portugal, in Lisbon, was concluded. Improvements were made to the former General Assembly room, at the Head Office. Repair works continued to be carried out in the Évora agency building and the process for the repair of the Braga agency building was started. The Bank increased the reliability of the technical facilities, namely by redesigning the emergency power supply systems at the main buildings of the Bank in Lisbon and in Oporto, adapting the lifting equipment to the legislation currently in force, implementing a centralised technical management system at the Oporto branch building, and, finally, by improving the fire detection, intrusion and access control systems. Banco de Portugal | Annual Report | 2004 Report and Financial Statements 9. FINANCIAL STATEMENTS 9.1. Presentation and proposal for the distribution of results Pursuant to the provisions of Article 54 of the Organic Law of Banco de Portugal, this Report presents the financial statements for the year 2004, approved by the Board of Directors (see sections 9. 2. and 9. 3.). The annual accounts of the Bank were audited by external auditors, pursuant to the provisions laid down in Article 46 of the Organic Law of Banco de Portugal (see section 9.4.). In accordance with the provisions of Article 43, the Board of Auditors prepared a report and issued an opinion on the financial statements (see section 9.5.). The Advisory Board reviewed and issued a favourable opinion on the Bank’s activity and accounts. Main changes in the composition of the balance sheet The table below shows the developments in the year-end positions of the main items of Banco de Portugal’s balance sheet since 1999: BALANCE SHEET OF BANCO DE PORTUGAL - YEAR-END POSITIONS EUR million 1999 2000 2001 2002 2003 2004 26,377.72 27,130.13 27,439.46 28,389.97 29,622.82 30,723.20 Gold 5,647.11 5,715.45 6,144.38 6,218.90 5,492.99 4,779.22 Financial assets denominated in foreign currency 5,688.25 6,674.43 7,338.05 7,377.24 3,758.86 4,183.50 Financial assets denominated in euro 5,923.10 5,915.96 5,890.05 5,943.31 9,810.23 9,860.18 Claims related to swaps 3,379.60 3,566.00 3,863.00 3,490.47 2,139.77 839.01 Monetary policy operations 2,387.58 3,256.46 2,168.70 1,026.80 2,492.77 2,873.02 Intra-Eurosystem claims 2,543.75 1,058.92 1,057.86 3,571.39 5,228.22 7,475.51 Participating interest and claims equivalent to the transfer of foreign reserves to the ECB 1,057.76 1,057.76 1,057.76 1,057.76 1,057.76 1,082.11 Other intra-Eurosystem claims 1,485.99 1.16 0.10 2,513.63 4,170.46 6,393.40 808.33 942.91 977.42 761.86 699.99 712.77 26,377.72 27,130.13 27,439.46 28,389.97 29,622.82 30,723.20 Banknotes in circulation 6,932.72 6,186.63 5,573.08 7,992.29 9,529.66 11,386.05 Liabilities to credit institutions related to monetary policy 4,009.15 3,879.18 4,415.12 4,622.09 11,705.58 6,252.16 Certificates of deposit 4,573.73 3,783.56 2,939.46 2,029.49 1,053.66 - Liabilities related to swaps 3,379.60 3,618.23 3,848.87 3,488.68 2,148.69 841.87 Intra-Eurosystem liabilities - 4,307.41 4,397.88 5,099.48 449.78 7,717.99 Other liabilities 3,381.23 539.80 762.58 356.63 467.00 411.55 Provisions 2,300.12 2,604.16 2,955.24 2,723.06 2,280.21 2,232.03 Revaluation accounts 1,623.18 2,004.53 2,291.31 1,771.14 1,459.83 1,162.01 Capital and reserves 122.83 150.41 178.52 217.22 459.37 649.50 Profit for the year 55.14 56.23 77.40 89.89 69.04 70.03 ASSETS Other claims LIABILITIES AND EQUITY Banco de Portugal | Annual Report | 2004 245 Report and Financial Statements The change in the balances on the main items of Banco de Portugal’s balance sheet in 2004 was as follows: EUR million Total assets/liabilities as at 31 December 2003 Increases (+) /Decreases (-) in Assets Liabilities 29,622.82 29,622.82 1,100.39 1 ,100.39 Gold -713.77 Financial assets denominated in foreign currency 424.64 Financial assets denominated in euros Claims related to swaps Monetary policy operations Intra-Eurosystem claims Participating interest and claims equivalent to the transfer of foreign reserves to ECB Other intra-Eurosystem claims Other claims 49.95 -1,300.76 380.26 2,247.29 Changes in the balance sheet of Banco de Portugal in 2004 resulted, on the one hand, from operations not related to the Bank’s asset management, reflecting the exogenous behaviour of the public and of credit institutions that are counterparties of the Bank in operations related to the decentralised implementation of monetary policy and the operation of payment systems. On the other hand, the changes resulted from asset management operations, limited by the conditions prevailing in international financial markets and by decisions about the desirable composition of the balance sheet. The significant increase in banknotes in , . circulation recorded in liabilities of Banco de Portugal mainly reflects the 15 per cent increase in overall circulation at the Eurosystem level, and adjustments provided for in Decision ECB/2001/15. The book-entry change in the banknote circulation of Banco de Portugal was counterbalanced by the increase in the partially remunerated intra-Eurosystem claims regarding banknote issuance (reflected in Other intraEurosystem claims). 24.35 2,222.94 BANKNOTES IN CIRCULATION , . 12.000,00 12.78 10.000,00 , . Other liabilities -55.45 Provisions -48.18 Revaluation accounts -297.81 Capital and reserves 190.13 Profit for the year Total assets/liabilities as at 31 December 2004 246 0.99 30,723.20 30,723.20 2.000,00 , . 1999 2000 2001 6,384.42 7,268.21 5,001.63 Intra-Eurosystem liabilities , . 4.000,00 5,372.36 -1,306.81 2,490.27 Liabilities related to swaps 5,502.02 -1,053.66 5,573.08 Certificates of deposit 6.000,00 , . 6,186.63 -5,453.42 , . 8.000,00 6,932.72 Liabilities to credit institutions related to monetary policy 4,157.31 1,856.39 EUR million Banknotes in circulation 2002 2003 2004 0,00 . Actual Circulation CSM and ECB Adjustments The change in the balance on monetary policy operations (around €380 million) basically corresponded to satisfying the primary liquidity needs of the national banking system, taking into account changes in the actual demand for banknotes by the public and in deposits of credit institutions, the redemption of €1,053 million of the last tranche Banco de Portugal | Annual Report | 2004 Report and Financial Statements of certificates of deposit issued by Banco de Portugal and cross-border operations of the TARGET system reflected in the balance on intra-Eurosystem liabilities. EXCHANGE RATE DEVELOPMENTS - EUR/USD AND EURO EFFECTIVE RATE 1,4 . Claims Liabilities Average percentage rates 1,3 . MONETARY POLICY AND INTRA-EUROSYSTEM LIABILITIES 6.000,00 , . 4.000,00 , . 2.000,00 , . 0,00 . -2.000,00 , . -4.000,00 , . -6.000,00 , . -8.000,00 , . -10.000,00 , . -12.000,00 , . -14.000,00 , . 2000 2001 2002 2003 1,2 . . 1,1 1,0 . 0,9 . 0,8 . 0,7 . EUR/USD 0,6 . Jan.99 Jan.00 Jan.01 taxa efectiva do rate euro Euro effective Jan.02 Jan.03 Jan.04 Sources: Bloomberg and ECB. 2004 Monetary policy operations Certificates of deposit Actual banknotes in circulation Deposits of credit institutions Intra-Eurosystem liabilities US DOLLAR INTEREST RATE Banco de Portugal | Annual Report | 2004 8,0 . 7,0 . 3M 2Y 10Y Percentage mid-rate 6,0 . 5,0 . 4,0 . 3,0 . 2,0 . 1,0 . 0,0 . Jan.99 Jan.00 Jan.01 Jan.02 Jan.03 Jan.04 Source: Bloomberg. EURO INTEREST RATES 6,0 . 5,0 . Percentage mid-rates The change in 2004 in the overall value of assets managed by Banco de Portugal was affected by the conditions prevailing in international financial markets and by decisions regarding the desirable composition of these assets. In 2004 the depreciating trend of the US dollar against the major currencies (namely the euro) continued. The low interest rate levels in the euro area also persisted, although US monetary authorities have started to raise the key interest rates that induced rises in short-term market interest rates. However, this did not significantly affect the level of longer-term interest rates, which remained low, despite some movements. In turn, developments in gold quotations were positive in US dollars, mitigated or even countered in yearend values, when converted into euro. These price developments in the markets determined reductions in unrealised capital gains in gold operations and, albeit to a much lesser extent than in 2003, write-downs in foreign currency and euro portfolios, which, according to the accounting rules of the Eurosystem, were recognised as losses for the year. With regard to internal portfolio management decisions, in order to prevent possible adverse effects of protracted rises in interest rates, exposure to this risk was reduced through the decrease in the duration of the respective 4,0 . 3,0 . 2,0 . 1,0 . 0,0 . Jan.99 3M Jan.00 2Y Jan.01 10Y Jan.02 Jan.03 Jan.04 Source: Bloomberg. 247 Report and Financial Statements portfolios. In addition, and taking into account the exchange rate risk, as from 2003 the Bank pursued activities aimed at reducing this risk, by increasing the volume of the euro portfolio and diversifying exposure to European currencies, in strict compliance with the rules agreed within the Eurosystem. Mention should be made to the sale of 55 tons of gold, under the Central Bank Gold Agreement of 26 September 1999, which was renewed in 2004. The investment portfolio chart below shows the effect of this shift as from 2003: PROVISIONS AND REVALUATION DIFFERENCES , 3.000 , 2.500 , 2.000 , 1.500 , 1.000 500 0 1999 INVESTMENT PORTFOLIO 2000 2001 Provisions 2002 2003 2004 Revaluation differences 12.000 , 10.000 , CAPITAL AND RESERVES EUR million 8.000 , 700 6.000 , 649.5 600 4.000 , 459.4 6,674.43 5,915.96 7,338.05 5,890.05 7,377.24 5,943.31 3,758.86 9,810.23 4,183.50 9,860.18 2.000 , 5,688.25 5,923.10 500 1999 2000 2001 2002 2003 2004 400 300 0 217.2 Financial assets denominated in foreign currency Financial assets denominated in euro 200 150.4 178.5 122.8 100 0 The reduction in swaps mainly reflects decisions resulting from market developments that determined lower remuneration rates in this segment of active management of the gold portfolio. In 2004 own resources declined, as a result of the decrease in positive revaluation differences, which was not offset by the increase in reserves. This increase includes both the investment of 2003 results and the building up of the reserve originating from capital gains in gold sale operations. The decrease in unrealised capital gains is essentially due to the reduction in positive gold revaluation differences as a result of both the abovementioned sales and the decline in the gold quotation expressed in euro. 248 1999 2000 2001 2002 2003 2004 Developments in the profit and loss account The main components of the profit and loss account are shown as a time series from 1999 to 2004 in the next table. The net profit/loss for 2004 amounted to €70,03 million, i.e. a figure similar to that recorded in 2003. It reflects a recovery in the interest margin and better realised gains/losses arising from financial operations, with unrealised recognised foreign exchange losses much lower than those recorded in 2003 and 2002, therefore requiring a much lower utilisation of provisions for risks. Banco de Portugal | Annual Report | 2004 Report and Financial Statements EUR million Total net income of which: Interest margin Net result of financial operations, write-downs and risk provisions Total costs and losses of which: Total administrative expenses Transfer to/from other provisions and reserves Net profit/loss for the year 1999 2000 2001 2002 2003 2004 208.29 297.09 316.76 289.59 469.92 421.90 305.21 276.39 192.97 73.58 141.03 185.07 -113.30 8.37 69.79 153.19 294.69 249.34 153.13 240.79 239.31 183.98 365.50 324.96 131.10 136.59 143.26 149.51 151.30 157.44 0.00 74.43 -7.66 -2.86 194.60 155.61 55.14 56.23 77.40 89.89 69.04 70.03 The increase of €44 million in the interest margin in 2004 is essentially due to a decrease in interest payable and a slight increase in the amount of interest income. In a context of low and decreasing average – both lending and deposit – interest rates, these developments mainly reflected the higher decline in deposit average rates and the quantitative increase in remunerated assets (remunerated share of adjustments to banknotes in circulation and assets stemming from the investment in proceeds from gold sales). In 2004 the amount of gains/losses arising from financial operations includes gains from gold sale operations as well as other realised positive gains/losses, mainly originating from foreign exchange operations. The chart below illustrates the components of net gains/losses arising from financial operations, write-downs recognised in the profit and loss account and the utilisation of provisions for risks to cover these losses. INTEREST MARGIN 500 900 400 300 700 600 500 8.37 0 -100 -300 300 249.34 69.79 100 -200 400 153.19 200 -113.30 Expenses EUR million 800 EUR million 294.69 Income 600 1.000 , -400 200 -500 100 0 1999 2000 Interest received 2001 2002 Interest payed 2003 2004 1999 2000 2001 2002 2003 2004 Realised gains/losses arising from financial operations Write-downs on financial assets and positions Transfers to/from provisions for risks Net result of financial operations, write-downs and risk provisions Interest margin Banco de Portugal | Annual Report | 2004 249 Report and Financial Statements 250 Banknote production services continued to follow a downward trend (55 per cent compared with the amount recorded in 2003), after the first two years associated with the euro cash changeover. TOTAL ADMINISTRATIVE EXPENSES 180 160 140 120 EUR million Taking into consideration the prudential criteria set out in the Chart of Accounts of Banco de Portugal ("Plano de Contas do Banco de Portugal - PCBP") and the overall risk positions the Bank is exposed to, year-end movements in provisions items include increases in the provision for interest rate risks and in the provision for equity price fluctuation risks, in order to meet the level of liabilities denominated in euro and possible devaluations in equity prices respectively. Reference should also be made to the appropriation for the special reserve comprised by gains in gold sale operations. In 2004 the amounts involved in the coverage of losses calculated by the ECB were significant, thereby affecting income from equity capital (due to the non-distribution of the ECB’s seigniorage income) and the "Net result of pooling of monetary income"(that required the settingup and utilisation of a provision for that purpose). Administrative expenses in 2004 increased by 4.1 per cent, in particular staff costs that grew by 3.5 per cent, accounting for 69.6 per cent of the total, and supplies and services from third parties that increased by 4 per cent, accounting for 20.6 per cent of the total. 100 80 60 40 20 0 1999 2000 2001 2002 2003 2004 Repayments Other administrative expenses Supplies and services from third parties Staff costs Banco de Portugal | Annual Report | 2004 Report and Financial Statements net profit for the fiscal year of 2004, to the amount of €70.03 million, shall be distributed as follows: Distribution of results The profit for 2003 stood at €69 million and was distributed as follows: 10% to the legal reserve ........................................... EUR 7,003,309.38 10% to the legal reserve ........................................... EUR 6,904,258.19 10% to other reserves ........................................... EUR 7,003,309.38 40% to other reserves ........................................... EUR 27,617,032.78 and, to the provisions of sub-paragraph c): the remainder to the State, as dividends ........................................... EUR 34,521,290.97 30% to other reserves ........................................... EUR 21,009,928.14 According to the provisions set forth in Article 53 (2) of the Organic Law of Banco de Portugal, the 50% the remainder to the State, as dividends1 ........................................... EUR 35,016,546.90 Lisbon, 8 March 2005 BOARD OF DIRECTORS Governor Vítor Manuel Ribeiro Constâncio Vice-Governors António Manuel Martins Pereira Marta José Agostinho Martins de Matos Directors Manuel Ramos de Sousa Sebastião Vítor Manuel da Silva Rodrigues Pessoa José António da Silveira Godinho 1 Income tax payments are expected to amount to around €26.9 million. Banco de Portugal | Annual Report | 2004 251 Report and Financial Statements 9.2. Financial Statements BALANCE SHEET OF THE BANCO DE PORTUGAL Assets 31/12/2004 Note Number Accumulated depreciation Gross assets and provisions 31/12/2003 Net assets Net assets 1 Gold and gold receivables 2 4,779,217 4,779,217 5,492,988 2 Claims on non-euro area residents denominated in foreign currency 2.1 Receivables from the IMF 2.2 Balances with banks and security investments, external loans and other external assets 3 3,753,233 405,855 3,753,233 405,855 4,602,918 507,340 4 3,347,378 3,347,378 4,095,578 3 Claims on euro area residents denominatedin foreign currency 4 749,614 749,614 331,109 5 736,711 736,711 736,711 736,711 1,145,697 1,145,697 6 2,873,023 190,800 2,682,223 2,873,023 190,800 2,682,223 2,492,767 2,384,566 108,201 955 955 200 5 9,642,172 9,642,172 9,628,931 7 7,475,507 99,779 7,475,507 99,779 5,228,216 96,160 982,331 982,331 961,600 6,384,422 6,384,422 4,157,306 8,975 8,975 13,150 61 61 3 023 131,970 29,147 712,710 34,403 101,993 94,183 696,969 28,623 107,071 94,161 98,110 24,742 192,892 264,497 56,278 163,816 247,020 30,723,203 29,622,81 4 Claims on euro area residents denominatedin euros 4.1 Balances with banks, security investments and loans 4.2 Claims arising from the credit facility under ERM II 5 Lending to euro area credit institutions related to monetary policy operations denominated in euro 5.1 Main refinancing operqtions 5.2 Longer-term refinancing operations 5.3 Fine-tuning reverse operations 5.4 Structural reverse operations 5.5 Marginal lending facility 6 Other claims on euro area credit institutions denominated in euro 7 Securities of euro area residents denominated in euro 8 General government debt denominated in euro 9 Intra-Eurosystem claims 9.1 Participating interest in ECB 9.2 Claims equivalent to the transfer of foreign reserves to the ECB 9.3 Claims related to TARGET accounts (net) 9.4 Net claims related to the allocation of euro banknotes within the Eurosystem 9.5 Claims related to other operational requirements within the Eurosystem 10 Items in course of settlment 11 Other assets 11.1 Coins of euro area 11.2 Tangible and intangible fixed assets 11.3 Other financial assets 11.4 Off-balance sheet instruments revaluation differences 11.5 Accruals and prepaid expenses 11.6 Sundry 8 9 971,938 34,403 233,963 123,330 10 11 12 24,742 192,892 362,607 Total depreciation Total provisions 131,970 127,257 Total assets 30,982,431 Off-balance sheet instrumentss Collateral received Forward foreign exchange and interest rate transactions – purchases Forward foreign exchange and interest rate transactions – sales Other forward transactions – purchases Other forward transactions – sales Securities and other items held in custody 252 259,228 259,228 31/12/2004 31/12/2003 1,593,275 1,681,011 32 809,501 1,231,176 32 32 32 809,501 954,570 1,231,176 1,325,758 698,730 18,597,742 20,183,584 Banco de Portugal | Annual Report | 2004 Report and Financial Statements AS AT 31 DECEMBER 2004 EUR thousands Liabilities 31/12/2004 31/12/2003 13 11,386,053 9,529,663 14 6,252,158 6,252,158 11,705,577 11,705,577 3 Other liabilities to euro area credit institutions denominated in euro 14 109,562 241,330 4 Debt certificates issued 15 5 Liabilities to other euro area residents denominated in euro 5 1 General government 5.2 Other liabilities 16 1,454 174 1,280 1,383 2 1,382 6 Liabilities to non-euro area residents denominated in euro 17 418,696 747,043 7 Liabilities to euro area residents denominated in foreign currency 18 32,969 151,574 8 Liabilities to non-euro area residents denominated in foreign currency 8.1 Deposits, balances and other liabilities 8.2 Liabilities arising from the credit facility under ERM II 18 287,157 287,157 1,024,358 1,024,358 3 60,763 62,811 10 Intra-Eurosystem liabilities 7 10.1 Liabilities related to promissory notes backing the issuance of ECB debt certificates 10.2 Liabilities related to TARGET accounts (net) 10.3 Net liabilities related to the allocation of euro banknotes within the Eurosystem 10.4 Liabilities related to other operational requirements within the Eurosystem 7,717,986 449,779 7,704,645 437,128 13,341 12,650 Note Number 1 Banknotes in circulation 2 Liabilities to euro area credit institutions related to monetary policy operations denominated in euro 2.1 Current accounts 2.2 Deposit facility 2.3 Fixed-term deposits 2.4 Fine-tuning reverse operations 9 Counterpart of special drawing rights allocated by the IMF 1,053,661 11 Other liabilities 11.1 Off-balance-sheet instruments revaluation differences 11.2 Accruals and income collected in advance 11.3 Sundry 10 19 20 342,824 5,512 54,151 283,160 387,188 34,334 48,178 304,675 12 Provisions 21 2,232,032 2,280,208 13 Revaluation accounts 22 1,162,013 1,459,827 14 Capital and reserves 14.1 Capital 14.2 Reserves 23 649,502 1,000 648,502 459,374 1,000 458,374 70,033 69,043 30,723,203 29,622,818 15 Profit for the year Total equity and liabilities Note: Due to rounding, totals/sub-totals included in the financial statements and respective notes may not add up, since figures are presented in € thousand. Head of the Control and Accounting Department Vítor Pimenta e Silva Banco de Portugal | Annual Report | 2004 253 Report and Financial Statements PROFIT AND LOSS ACCOUNT Items Note Number EUR thousands 31/12/2004 31/12/2003 1 Interest income 495,645 492,740 2 Interest expenses 310,577 351,706 3 Net interest income 24 185,068 141,034 4 Realised gains/losses arising from financial operations 25 210,471 -21,049 5 Write-downs on financial assets and positions 26 43,211 130,655 6 Transfer to/from provisions for risks 21 82,084 446,397 249,344 294,692 8 Fees and commissions income 4,284 3,850 9 Fees and commissions expense 3,199 3,586 10 Net income from fees and commissions 1,084 264 7 Net result of financial operations, write-downs and risk provisions 11 Income frome quity shares and participating interests 27 2,271 16,655 12 Net result of pooling of monetary income 28 -24,707 13,150 13 Other income 29 8,836 4,120 421,897 469,916 109,006 105,323 32,480 31,232 960 711 14,998 14,034 19 Total administrative expenses 157,444 151,301 20 Banknote production services 3,297 7,281 14 Total net income 15 Staff costs 30 16 Supplies and services from third parties 17 Other administrative expenses 18 Depreciation for the year 8 21 Other expenses 29 8,613 12,315 22 Transfer to/from other provisions and reserves 23 155,607 194,601 324,961 365,498 26,903 35,375 70,033 69,043 Proposal for 2004 2003 Net Profit/Loss for the year 70,033 69,043 Distribution: - to reserves - to the State 35,017 35,017 34,521 34,521 23 Total costs and losses (net) 24 Income tax 31 25 Net profit/loss for the yearResultado líquido do exercício Profit distribution Note: Due to rounding, totals/sub-totals included in the financial statements and respective notes may not add up, since figures are presented in € thousand. Head of the Control and Accounting Department Vítor Pimenta e Silva 254 Banco de Portugal | Annual Report | 2004 Report and Financial Statements 9.3. Notes on the Financial Statements (€ thousands) NOTE 1: Bases of presentation and main accounting policies 1.1. Bases of presentation The financial statements of Banco de Portugal (hereinafter called "Bank") have been drawn up in accordance with the Chart of Accounts of Banco de Portugal (PCBP). With regard to the accounts related to the main operating areas of the Bank, the PCBP covers the principles, criteria and techniques set out by the European Central Bank (ECB) for the European System of Central Banks (ESCB), in order to ensure consistency, reliability and comparability of accounting data reported by the national central banks (NCBs) of the Member States. Although the PCBP does not provide for specific rules on the accounting registration of certain transactions nor on the items to be recorded in the annex to the balance sheet and to the profit and loss account, the Board of Directors, when reporting on the financial position of the Bank, and its profit/loss and operations, complies with the applicable ECB recommendations and with the principles and practices generally accepted in Portugal for the financial sector, to the extent that such principles and practices are deemed appropriate within the framework of the central bank’s tasks and responsibilities. Thus, the financial statements of the Bank may disclose fewer details on its assets, liabilities, responsibilities, contingencies and risks than those of commercial financial institutions. The PCBP is obviously subject to a continuous adjustment process, which results, at the individual level, from the need to have an accounting framework for the treatment of new situations and, at the Eurosystem level, from the need to transpose into the national accounting standards the changes introduced by the ECB in this regard. In 2004 changes to the PCBP consist in small improvements, in order to cover new needs related to the accounting of operations and to Banco de Portugal | Annual Report | 2004 present data for publication in a clearer manner, with a revision of the numbers of the profit and loss account items. A change was made to the comparative data presented in the following Notes, related to the fiscal year ended on 31 December 2003, in order to reflect underlying reclassifications. Holdings in subsidiaries are recorded in the financial statements, as described in section 1.2 h) of this Note. Given the immaterial nature of the results of any consolidation process, the Bank does not prepare consolidated financial statements. In addition, in accordance with Article 29.3 of the Statute of the ESCB and of the ECB, the weightings for the subscription of the ECB’s capital assigned to national central banks shall be adjusted every five years. The first quinquennial change took effect as of 1 January 2004, based on statistical data approved by the Council Decision of 15 July 2003. On 1 May 2004, due to the EU enlargement process, the weighting in the subscription of the ECB’s capital was further revised. 1.2. Synopsis of the main accounting policies The main accounting policies and valuation criteria used in the preparation of the financial statements for the year 2004 were the following: a) Accrual basis of accounting The Bank follows the accruals principle of accounting in relation to the majority of the financial statement items, namely with regard to interest on lending and deposit operations, which is recognised in the accounting period in which it is earned and not according to the period in which it is received. b) Recognition of gains and losses in financial operations Realised gains and losses arising from financial operations are tken to the profit and loss account on the settlement date. In the course of the year revaluation differences (difference between the market value and the 255 Report and Financial Statements weighted average cost) are registered in the balance sheet, in a specific revaluation account for each type of asset. At the end of the year negative revaluation differences are recognised in results as "Writedowns". Revaluation differences in any one security or currency are not netted against each other. c) Conversion of assets, liabilities, offbalance-sheet instruments and profit and loss denominated in foreign currency Assets, liabilities and off-balance-sheet instruments denominated in foreign currency are converted into euro at the exchange rate prevailing on the balance sheet date. Income and expenses denominated in foreign currency are, in turn, converted at the exchange rate prevailing on the settlement date of each transaction. d) Foreign currency transactions The calculation of foreign exchange gains or losses is made on an item-by-item basis by reference to the respective weighted average cost, which is computed from the “daily net cost” method. This method implies that the average exchange rate of each foreign currency is only changed when the amount purchased on a given day is higher than the amount sold. The result of sales is determined by the differential between the transaction value and the average cost of the day. Where the amounts sold are higher than those purchased, the average cost of the day is determined by two components: day purchases (at the transaction value) plus the differential between day sales and purchases (at the historical weighted average cost). Where a liability position exists in respect of a foreign currency, the reverse treatment shall apply. Therefore, the average cost of the liability position shall be recorded by net sales, while net purchases are entered in results. Spot and forward foreign exchange transactions and currency swaps are recorded as follows: 256 Foreign exchange spot transactions • Spot purchases and sales of foreign currency are recorded on the settlement date, which is when the weighted average cost of the currency position is calculated; • Spot purchases of foreign currency against the sale of euro are recorded at the transaction’s exchange rate; • Spot purchases of foreign currency against the sale of another foreign currency are recorded in euro, through the use of the spot exchange rate on the contract date of the transaction’s currency; • In spot sales of foreign currency against euro the operation’s foreign exchange gains and losses arise from the difference between the equivalent of the transaction in euro and the average cost of the foreign currency sold; • In spot sales of foreign currency against the purchase of another foreign currency, the operation’s foreign exchange gains and losses arise from the difference between the equivalent in euro of the transaction’s currency at the transaction’s exchange rate and the average cost of the foreign currency sold. Foreign exchange forward transactions • These transactions are recognised in offbalance-sheet accounts from the contract date to the settlement date at the spot rate prevailing on the contract date; • Forward purchases of foreign currency against the forward sale of another foreign currency are recorded in euro through the use of the spot exchange rate on the contract date of the transaction’s currency. The difference between the spot and the forward equivalents is treated as interest payable/receivable on an accruals basis up to the settlement date of the transaction. These results are recognised as realised on the settlement date. The weighted average cost of the currency position is computed two days after the contract date of the transaction; Banco de Portugal | Annual Report | 2004 Report and Financial Statements • In forward sales of foreign currency foreign exchange gains and losses arise from the difference between the equivalent in euro, at the spot rate, of the transaction’s currency and the weighted average cost of that currency, and are treated as unrealised until the settlement date, when they are recorded in the profit and loss account. The difference between the spot and forward equivalents is treated as interest payable/receivable on an accruals basis up to the settlement date of the transaction. Foreign exchange swaps Transactions involving the simultaneous spot purchase/sale of one currency against another and forward sale/purchase of the same amount of this currency against the other. • Spot purchases/sales are treated as foreign exchange spot transactions (in balance-sheet accounts); forward purchases/sales are treated as forward foreign exchange transactions and recognised in off-balance-sheet accounts from the contract date to the maturity date at the spot rate prevailing on the former; • The difference between the spot and forward rates is treated as interest payable/receivable on an accruals basis over the life of the transaction; • The weighted average cost of each foreign currency position is not recorded since currency inflows and outflows occur simultaneously and for the same value; • There are no revaluation differences in foreign currency positions since they are derived from the spot and forward currency positions as a whole. e) Gold Gold is revalued at market price for the purpose of preparing the financial statements. The accounting treatment of gold is similar to that of foreign currencies referred to in d) above. In sum, the average cost of the gold stock is only changed when the amount purchased on a given Banco de Portugal | Annual Report | 2004 day is higher than the amount sold. Proceeds from the sales are derived from the differential between the transaction value and the weighted average cost. The method for the recognition of profit/loss is also equal to that of foreign currency transactions. f) Securities The portfolio of marketable securities is valued at market price. The calculation and recognition of profit/loss in marketable securities complies with the weighted average cost criterion for each type of security. According to this method, acquisition costs on a daily basis are added to the weighted average cost of each specific security, so that a new weighted average cost can be calculated. Sales are deducted from the stock by applying the last weighted average cost. The difference between the value of the sales and the weighted average acquisition cost plus the corresponding premium or discount, by type of security, is treated as a realised gain or loss. In turn, the premium or discount paid before the sale is also treated as a realised gain or loss (interest). Revaluation differences are measured by the difference between the weighted average cost of the stock, plus the corresponding premium or discount, and the respective market value and treated as referred to in b) above. The portfolio of non-marketable securities (see Note 9), whose value is negligible, is recorded at historical cost. A provision is made for the estimated depreciation, calculated on a straightline basis. g) Repos and reverse repos Repos and reverse repos involve the sale or repurchase of funds, collateralised by securities temporarily pledged or received as a guarantee. Securities sold under a repurchase agreement remain on the balance sheet of the Bank and are treated as if they had remained part of the portfolio from which they were sold. Liabilities for the amounts received in repos are recorded on the liabilities side, including interest, which is recorded as a cost on an accrual basis. 257 Report and Financial Statements The lending of funds through reverse repos is recorded on the assets side of the Bank’s balance sheet, being treated as a loan, and the interest is recognised on an accrual basis. h) Participating interests Participating interests of a long-standing nature, whose maintenance is of particular interest to the Bank’s activity, are recorded in the financial statements, under other financial assets. Participating interests are recorded according to the cost criterion less the provisions deemed adequate. i) Banknotes in circulation The ECB and the 12 NCBs, which together comprise the Eurosystem, have issued euro banknotes since 1 January 2002.2 The total value of euro banknotes in circulation is allocated on the last working day of each month in accordance with the "banknote allocation key".3 The ECB has been allocated a share of 8 per cent of the total value of euro banknotes in circulation, whereas the remaining 92 per cent has been allocated to NCBs according to their weightings in the capital key of the ECB. The share of euro banknotes allocated to each NCB is disclosed under the balance sheet liability item “Banknotes in circulation”. The difference between the value of euro banknotes allocated to each NCB in accordance with the banknote allocation key and the value of the euro banknotes actually put into circulation gives rise to remunerated intra-Eurosystem balances. These claims or liabilities, which incur interest,4 are disclosed under the sub-item "IntraEurosystem: Net claim/liability related to the allocation of euro banknotes within the Eurosystem" (see section 1.2. j) of this Note). From 2002 to 2007 intra-Eurosystem balances arising from the allocation of euro banknotes will be adjusted in order to avoid significant changes in NCBs’ relative income positions as compared to previous years. These adjustments are based on the difference between the average value of banknotes in circulation of each NCB in 258 the period from July 1999 to June 2001 and the average value of banknotes that would have been allocated to them during that period under the ECB’s capital key. The adjustments will be reduced in annual stages until the end of 2007. After this date, income on banknotes will be allocated fully in proportion to the NCBs’ paidup shares in the ECB’s capital. The interest income and expense on these balances is cleared through the accounts of the ECB and disclosed under "Net interest income". The Governing Council of the ECB has decided that the seigniorage income from the ECB which arises from the 8 per cent share of euro banknotes allocated to the ECB shall be distributed separately to the NCBs in the form of an interim distribution of profit.5 It shall be distributed in full unless the ECB’s net profit for the year is less than its income earned on euro banknotes in circulation and subject to any decision by the Governing Council to reduce this income in respect of costs incurred by the ECB in connection with the issue and handling of euro banknotes. With respect to 2004, the Governing Council decided, in the light of its estimates, that the full amount of such income should be retained by the ECB. j) Intra-ESCB balances Banco de Portugal’s share in the capital of the ECB and the position on the foreign reserve assets transferred to the ECB result from applying the weightings referred to in Article 29 of the Statute of the ESCB and of the ECB. 2 ECB Decision, of 6 December 2001, on the issue of euro banknotes (ECB/2001/15), OJ L337 of 20.12.2001, pp. 52-54. 3 Banknote allocation key means the percentages that result from taking into account the ECB’s share in the total euro banknote issuance and applying the subscribed capital key to the NCBs ’ share in this total. 4 ECB Decision , of 6 December 2001, on the allocation of monetary income of the national central banks of participating Member States from the financial year 2002 (ECB/2001/16), OJ L337 of 20.12.2001, pp. 55 -61. 5 ECB Decision , of 21 November 2002, on the distribution of the income of the European Central Bank on euro banknotes in circulation to the national central banks of the participating Member States (ECB/2002/09), OJ L323, of 28.11.2002, pp. 49-50. Banco de Portugal | Annual Report | 2004 Report and Financial Statements The intra-Eurosystem balances arising from banknote issuance are included as a single net position under "Net claims/liabilities related to the allocation of euro banknotes" (see Note 1.2. i) Banknotes in circulation). The balances on TARGET accounts represent the net position of the clearing system of all TARGET settlement accounts of the NCBs of the ESCB against the ECB’s settlement account. k) Provisions In accordance with Article 5 (2) of the Organic Law of Banco de Portugal, the Board of Directors may establish other reserves and provisions to meet depreciation risks or losses to which certain types of assets or operations are particularly exposed. Provisions for depreciation of specific assets are recorded in the balance sheet and deducted from the book value of these assets. The amounts assigned to these provisions result from the best estimate of the losses associated with each class of asset, on the basis of the market values or, in their absence, the expected market values. The remaining provisions for future contingency risks are recorded on the liabilities side. The amounts of these provisions take into account not only the appropriate prudential management criteria, within the framework of central bank responsibilities, but also the degree of volatility of the Bank’s main assets. Therefore, the following maximum reference limits were established, as set out in the PCBP: • Provision for gold fluctuation risks: 30 per cent of the gold value at market price; • Provision for exchange rate risks: 25 per cent of the overall exchange rate risk position; • Provision for securities valuation risks: 5 per cent of the securities’ value at market price; • Provision for interest rate risks: 2 per cent of the value of remunerated on-balance-sheet liabilities denominated in euro. Banco de Portugal | Annual Report | 2004 In addition, total gains in gold sale operations are transferred on a yearly basis to the reserve relating to these gains, according to the provisions set forth in Article 53 (1) (b) of the Organic Law of Banco de Portugal, and therefore no reference upper limit was established. l) Tangible and intangible fixed assets and assets under construction Tangible and intangible fixed assets are valued at cost less depreciation. Depreciation is calculated on a straight-line basis, according to the constant quote method, by applying to the historical cost the maximum annual rates allowed for tax purposes, which reflect the estimated useful life of the asset namely: Assets under construction are valued at the total costs already charged to the Bank and transferred to tangible assets when their effective use starts, and hence their depreciation. Tangible assets Buildings and other constructions Premises Number of years 10 to 50 4 to 20 Equipment Machinery and tools 4 to 10 Computer equipment 4 to 5 Transport equipment 4 to 6 Furniture and fittings 4 to 10 Computer software Intangible assets 3 10 m) Retirement pensions Banco de Portugal ensures the coverage of its liabilities for the payment of retirement, disability and survivors pensions through a Pension Fund (see Note 33). 259 Report and Financial Statements The recognition of costs and liabilities with retirement pensions is made in accordance with the provisions set forth in Notice of Banco de Portugal No. 12/2001 of 9 November, supplemented by Notice No 7/2002 of 31 December. According to the provisions laid down in Notice No. 12/2001, the amount recorded in Staff costs refers to the cost of the current service, interest costs and the expected income from the Pension Fund’s assets. Actuarial gains and losses result from (i) differences between actuarial and financial assumptions used and the values actually recorded and from (ii) changes introduced in actuarial and financial assumptions as well as in the general conditions of pension schemes. Differences between actuarial and financial assumptions used and the values actually recorded are included in an item under "Fluctuation of values", up to the maximum value of: 10 per cent of the value of liabilities for pensions paid and liabilities for past services of staff in active employment as at the end of the current fiscal year or 10 per cent of the value of the assets of the Pension Fund as at the end of the current fiscal year. The part that exceeds this limit is recorded under prepaid expenses or income respectively, whether it refers to losses or gains, of which 10 per cent is amortised every year over the following fiscal years. Gains or losses arising from changes in actuarial and financial assumptions and from the general conditions of pension schemes will be recorded under prepaid expenses or income respectively, of which 10 per cent is amortised every year over the following fiscal years. n) Supplements to retirement pensions The accounting principles used by the Bank in respect to the supplements to retirement and survivors pensions are the same used for the treatment of retirement pensions (see the previous section of this Note). The respective liabilities are also covered through the Pension Fund of Banco de Portugal. o) Income taxes Charges with income taxes are calculated in accordance with the provisions laid down in the Corporate Income Tax Code and the tax incentives and benefits applicable to the Bank. When there are significant temporary differences between the balance sheet value of assets and liabilities and the value of assets and liabilities considered for tax purposes, the Bank records the corresponding deferred taxes. Deferred taxes recorded on the assets side are recognised only to the extent of the deferred taxes recorded on the liabilities side. p) Derivative financial instruments Derivative financial instruments are revalued at the market value or, failing this, at the estimated market value. The revaluation differences are NOTE 2: Gold and gold receivables 31 / 12 / 2004 31/12/2003 Oz.o.f.(*) EUR thousands Oz.o.f.(*) EUR thousands Gold in storage at the Bank 5,551,053.77 1,785,008 5,551,053.77 1,833,869 Gold sight accounts 5,054,152.18 1,625,223 1,458,733.61 481,913 Gold term deposits 1,600,266.33 514,585 2,495,333.08 824,368 Gold related to swap operations 2,657,032.21 854,401 7,121,952.14 2,352,837 14,862,504.50 4,779,217 16,627,072.60 5,492,988 Gold reserve (*) 1 ounce of fine gold = 31,103481 grams of fine gold (grs. f. g.) 260 Banco de Portugal | Annual Report | 2004 Report and Financial Statements treated as described in section 1.2. b) of this Note, on an item-by-item basis. On 31 December 2004 gold was valued at the market price of €321.56 per ounce of fine gold (2003: €330.36), with a reduction of 55 tons in the physical stock when compared to the end of the previous fiscal year. This reduction resulted from sales made under the Central Bank Gold Agreement, signed in September 1999 and renewed in September 2004, and aimed at diversifying the composition of the Bank’s foreign reserve assets (see Notes 23 and 25). The decrease in the total value of gold results not only from the reduction in volume, but also of developments in its world market price. Negative developments in the quotation of gold expressed in euro were entirely due to the appreciation of the euro against the US dollar (USD), since the quotation of the ounce of fine gold in USD was valued, increasing from USD 417.25 on 31 December 2003 to USD 438 on 31 December 2004. Gold related to swap operations refers to gold temporarily transferred against cash received in USD and euro. These transactions are recorded as repo operations (see section 1.2. g) of Note 1). Given the volatility of the world market price of gold, the Bank has set up a provision for gold fluctuation risks within the limits defined in section 1.2. k) of Note 1, which is included in "Provisions" on the liability side of the balance sheet (see Note 21). This provision, after the reduction in 2004, as a consequence of the sale of 55 tons of gold, represented on 31 December 2004 a coverage rate of 14.4 per cent. NOTE 3: Lending and deposit operations with the International Monetary Fund (IMF) Quota in the IMF 31 / 12 / 2004 31 / 12 / 2003 988,489 1,021,798 (665, 624) (596,795) 322,865 425,002 75,500 72,014 7,491 10,324 405,855 507,340 Allocation of SDR by the IMF (60,763) (62,811) Liabilities to the IMF (60,763) (62,811) IMF holdings Reserve position in the IMF Holdings of SDR Other claims against the IMF Claims on the IMF The reserve position in the IMF represents Portugal’s quota in the IMF deducted from IMF holdings in the Bank. Claims on the IMF include the holdings of Special Drawing Rights (SDRs) and the contribution from Banco de Portugal to the PRGF (Poverty Reduction and Growth Facility), a long-term lending facility provided to poor countries, to the amounts of SDR 66,250,997 and SDR 6,573,000 respectively. Banco de Portugal | Annual Report | 2004 The liability item "Allocation of special drawing rights by the IMF" comprises the allocation of SDR 53,320,000. It should be noted that he significant reduction in "Claims on the IMF" is due not only to the depreciation of this currency unit vis-à-vis 31 December 2003, but also to the increase in the liability component of the reserve position "IMF holdings". 261 Report and Financial Statements NOTE 4: Balances with banks, security investments and other assets denominated in foreign currency 31/12/2004 31/12/2003 Balances with banks and security investments, external loans and other external assets denominated in foreign currency Demand deposits with non-euro area residents Securities of non-euro area residents Investments with non-euro area residents Claims on euro area residents denominated in foreign currency Demand deposits with euro area residents Investments with euro area residents Total security investments denominated in foreign currency Total balances with banks and other external loans and assets denominated in foreign currency Balances with banks, security investments and other investments in foreign currency at the end of 2004 are chiefly denominated in Danish krone (DKK), Swedish krona (SEK), Canadian dollar (CAD), pound sterling (GBP), Japanese yen (JPY) and US dollars (USD). 128,450 2,294,760 924,167 33,693 3,109,626 952,260 3,347,378 4,095,578 12 749,602 7 331,102 749,614 331,109 2,294,760 3,109,626 1,802,231 1,317,062 Investments with euro area and non-euro area residents denominated in foreign currency refer mostly to fixed-term deposits. Security investments denominated in foreign currency are broken down by type of debt instrument, as follows: 31/12/2004 31/12/2003 Securities of non-euro area residents denominated in foreign currency Treasury bills Treasury bonds Fixbis Other securities 852,644 754,141 1,323,612 2,040,094 118,498 315,391 7 - 2,294,760 3,109,626 NOTE 5: Balances with banks, security investments and other assets denominated in euro 31/12/2004 31/12/2003 115,275 621,436 1,139,953 5,744 736,711 1,145,697 9,642,172 9,628,931 10,378,883 10,774,628 9,757,447 10,768,883 621,436 5,744 Claims on non-euro area residents denominated in euro Security investments of non-euro area residents denominated in euro Balances with banks and other investments denominated in euro Securities of euro area residents denominated in euro Total security investments denominated in euro Total balances with banks and other loans and assets denominated in euro 262 Banco de Portugal | Annual Report | 2004 Report and Financial Statements Securities denominated in euro are broken down as follows: 31/12/2004 31/12/2003 115,275 19,987 1,119,966 115,275 1,139,953 6,059,547 3,582,625 - 6,374,325 2,174,673 1,079,932 9,642,172 9,628,931 9, 757,447 10,768,883 Securities of non-euro area residents denominated in euro Commercial paper Fixbis Securities of euro area residents denominated in euro Treasury bills Treasury bonds Commercial paper NOTE 6: Lending to euro area credit institutions related to monetary policy operations denominated in euro Since the end of June 2000 the main refinancing operations of the Eurosystem, composed of reverse repo transactions collateralised by eligible assets, started to be conducted as variable rate tenders, using the multiple rate auction technique, with a minimum bid rate set by the ECB. These operations provide the bulk of refinancing to the banking system, and since the allotment of 10 March 2004, with the changes introduced in applicable regulations, they have a maturity of one week (previously they were conducted with a weekly frequency and a maturity of two weeks). The average weighted rate of the operation carried forward stood at 2.16 per cent on 31 December 2004 (2.07 and 2.14 per cent on 31 December 2003). Longer-term refinancing operations have a monthly frequency and normally a maturity of three months. They are also reverse repo transactions collateralised by eligible assets and are conducted as variable rate tenders. The average weighted rates of operations outstanding stood between 2.10 and 2.14 per cent on 31 December 2004 and between 2.12 and 2.13 per cent on 31 December 2003. Banco de Portugal | Annual Report | 2004 NOTE 7: Intra-Eurosystem claims and liabilities Participating interest in the ECB Pursuant to Article 28 of the ESCB Statute, the ESCB national central banks are the sole subscribers to the capital of the ECB. Subscriptions depend on shares which are fixed in accordance with Article 29.3 of the ESCB Statute and which must be adjusted every five years. The first such adjustment following the establishment of the ECB took effect on 1 January 2004. On 1 May 2004 a second change in the ECB’s capital key followed as a result of the accession of 10 Member States. Based on the Council Decision of 15 July 2003 on the statistical data to be used for the determination of the key for subscription of the capital of the European Central Bank, the capital keys of NCBs were adjusted as follows on 1 January 2004 and 1 May 2004, by means of transfers among NCBs: 263 Report and Financial Statements Until 31/12/2003 Banque Nationale de Belgique Deutsche Bundesbank From 1/1/2004 to 30/4/2004 From 1/5/2004 2,8658 2,8297 2,5502 24,4935 23,404 21,1364 Bank of Greece 2,0564 2,1614 1,8974 Banco de España 8,8935 8,7801 7,7758 Banque de France 14,8712 16,8337 16,5175 Central Bank and Financial Services Authority of Ireland 0,8496 1,0254 0,9219 Banca d’Italia 14,895 14,5726 13,0516 Banque Centrale du Luxembourg 0,1492 0,1708 0,1568 3,9955 De Nederlandsche Bank 4,278 4,4323 Oesterreichische Nationalbank 2,3594 2,3019 2,08 Banco de Portugal 1,9232 2,0129 1,7653 1,397 1,4298 1,2887 80,9943 79,6384 71,4908 - - 1,4584 Suomen Pankki - Finlands Bank Total euro area NCBs Èeská národní banka Danmarks Nationalbank 1,6709 1,7216 1,5663 Eesti Pank - - 0,1784 Central Bank of Cyprus - - 0,13 Latvijas Banka - - 0,2978 Lietuvos Bankas - - 0,4425 Magyar Nemzeti Bank - - 1,3884 Central Bank of Malta - - 0,0647 Narodowy Bank Polski - - 5,138 Banka Slovenije - - 0,3345 Národná Banka Slovenska - - 0,7147 2,6537 2,6636 2,4133 14,6811 15,9764 14,3822 19,0057 20,3616 28,5092 100,0000 100,0000 100,0000 Sveriges Riksbank Bank of England Total non-euro area NCBs Total NCBs Consequently, on 1 January 2004, the share that Banco de Portugal held in the subscribed capital of the ECB – €5 billion in total – increased from 1.9232 to 2.0129 per cent and asset item 9.1 “Participating interest in the ECB” increased from €96,160 thousand to €100,645 thousand. In accordance with Article 49.3 of the Statute of the ESCB, which was added to the Statute by the Accession Treaty, the ECB’s subscribed capital is automatically increased when a new member joins the EU and its NCB joins the ESCB. The increase is determined by multiplying the prevailing amount of the subscribed capital (i.e. €5 billion) by the ratio, within the expanded capital key, between the weighting of the entering NCB(s) and the weighting of those NCBs that are already members of the ESCB. 264 Therefore, on 1 May 2004 the subscribed capital of the ECB was increased to €5.565 billion. Consequently, on 1 May 2004, the share that Banco de Portugal held in the increased subscribed capital of the ECB – €5.565 billion in total – decreased from 2.0129 to 1.7653 per cent and asset item 9.1 "Participating interest in the ECB" decreased from €100,645 thousand to €98,233 thousand. As a result of the aforementioned capital key changes, the relative shares of NCBs in the accumulated net profits of the ECB (also referred to as net equity) as at 31 December 2003 and 30 April 2004 changed. Sub-item 9.1, "Participating interest in the ECB", also reflects the net increase of Banco de Portugal’s share in this respect. Banco de Portugal | Annual Report | 2004 Report and Financial Statements Subscribed capital until 31/12/2003 Banque Nationale de Belgique Paid-up capital until 31/12/2003 Subscribed capital from 1/1/2004 a 30/4/2004 Paid-up capital from 1/1/2004 a 30/4/2004 Subscribed capital from 1/5/2004 Paid-up capital from 1/5/2004 143,290.00 143,290.00 141,485.00 141,485.00 141,910.20 141 910,20 1,224,675.00 1,224,675.00 1,170,200.00 1,170,200.00 1,176,170.75 1 176 170,75 Bank of Greece 102,820.00 102,820.00 108,070.00 108,070.00 105,584.03 105 584,03 Banco de España 444,675.00 444,675.00 439,005.00 439,005.00 432,697.55 432 697,55 Banque de France 841,685.00 841,685.00 825,875.00 825,875.00 827,533.09 827 533,09 Deutsche Bundesbank Central Bank and Financial Services Authority of Ireland Banca d’Italia Banque Centrale du Luxembourg 42,480.00 42,480.00 51,270.00 51,270.00 51,300.69 51 300,69 744,750.00 744,750.00 728,630.00 728,630.00 726,278.37 726 278,37 7,460.00 7,460.00 8,540.00 8,540.00 8,725.40 8 725,40 De Nederlandsche Bank 213,900.00 213,900.00 221,615.00 221,615.00 222,336.36 222 336,36 Oesterreichische Nationalbank 117,970.00 117,970.00 115,095.00 115,095.00 115,745.12 115 745,12 Banco de Portugal 96,160.00 96,160.00 100,645.00 100,645.00 98,233.11 98 233,11 Suomen Pankki-Finlands Bank 69,850.00 69,850.00 71,490.00 71,490.00 71,711.89 71 711,89 4,049,715.00 4,049,715.00 3,981,920.00 3,981,920.00 3,978,226.56 3 978 226,56 Total euro area NCBs Èeská národní banka - - - - 81,155.14 5 ,680.86 83,545.00 4,177.25 86,080.00 4,304.00 87,159.41 6,101.16 Eesti Pank - - - - 9,927.37 694.92 Central Bank of Cyprus - - - - 7,234.07 506.39 Latvijas Banka - - - - 16,571.59 1,160.01 Lietuvos Bankas - - - - 24,623.66 1,723.66 Magyar Nemzeti Bank - - - - 77,259.87 5,408.19 Central Bank of Malta - - - - 3,600.34 252.02 Narodowy Bank Polski - - - - 285,912.71 20,013.89 Banka Slovenije - - - - 18,613.82 1,302.97 2,783.95 Danmarks Nationalbank Národná Banka Slovenska - - - - 39,770.69 Sveriges Riksbank 132,685.00 6,634.25 133,180.00 6,659.00 134 292,16 9,400.45 Bank of England 734,055.00 36,702.75 798,820.00 39,941.00 800,321.86 56,022.53 950,285.00 47,514.25 1,018,080.00 50,904.00 1,586,442.69 111,050.99 5,000,000.00 4,097,229.25 5,000,000.00 4,032,824.00 5,564,669.25 4,089,277.55 Total non-euro area NCBs Total NCBs Claims equivalent to the transfer of foreign reserve assets In accordance with ECB Guideline of 3 November 1998 on the composition, valuation and modalities for the initial transfer of foreignreserve assets, and the denomination and remuneration of equivalent claims, as amended on 16 November 2000 (ECB/2000/15), in early 1999 Banco de Portugal transferred reserves equivalent to € 961 600 thousand euros consisting of USD, JPY and gold (XAU). In spite of the transfer to the ECB, the NCBs continue to manage such foreign-reserve assets on behalf of the ECB. These represent the Banco de Portugal claims arising from the transfer of foreign reserve assets Banco de Portugal | Annual Report | 2004 to the ECB. The claims are denominated in euro at a value fixed at the time of their transfer. They are remunerated at the latest available marginal rate for the Eurosystem’s main refinancing operations, adjusted to reflect a zero return on the gold component. The adjustments to the capital key weightings of the ECB on 1 January 2004 and 1 May 2004 also resulted in the adjustment of the claim of Banco de Portugal with respect to the foreign reserve assets transferred to the ECB. In order to reflect its increased/reduced capital key share, the eurodenominated claim of Banco de Portugal increased from €961,600 thousand to €1,006,450 thousand on 1 January 2004 and decreased from €1,006,450 thousand to €982,331 thousand on 1 May 2004. 265 Report and Financial Statements From 1/1/2004 to 30/4/2004 From 1/5/2004 1,432,900.00 1,414,850.00 1,419,101.95 12,246,750.00 11,702,000.00 11,761,707.51 Bank of Greece 1,028,200.00 1,080,700.00 1,055,840.34 Banco de España 4,446,750.00 4,390,050.00 4,326,975.51 Banque de France 8,416,850.00 8,258,750.00 8,275,330.93 424,800.00 512,700.00 513,006.86 7,447,500.00 7,286,300.00 7,262,783.72 74,600.00 85,400.00 87,254.01 De Nederlandsche Bank 2,139,000.00 2,216,150.00 2,223,363.60 Oesterreichische Nationalbank 1,179,700.00 1,150,950.00 1,157,451.20 Banco de Portugal 961,600.00 1,006,450.00 982,331.06 Suomen Pankki-Finlands Bank 698,500.00 714,900.00 717,118.93 40,497,150.00 39,819,200.00 39,782,265.62 Until 31/12/2003 Banque Nationale de Belgique Deutsche Bundesbank Central Bank and Financial Services Authority of Ireland Banca d’Italia Banque Centrale du Luxembourg Total Net claims related to the allocation of euro banknotes within the Eurosystem "Net claims related to the allocation of euro banknotes" refers to the asset position of Banco de Portugal regarding the allocation of euro banknotes within the Eurosystem (see sections 1.2. i) and 1.2. j) of Note 1). Claims related to other operational requirements within the Eurosystem On 31 December 2004 " Claims related to other operational requirements within the Eurosystem" refer (i) to the result of the calculation method applied to the monetary income of 2004, which was settled on 31 January 2005 (€8,875 thousand) and (ii) to receivables relating to the calculation of the repayment of the seigniorage income for the first quarter of 2004, accounted for by the change in the key for subscription of the ECB’s capital in the middle of the year (€100 thousand). 266 Liabilities related to TARGET accounts On 31 December 2004 "Liabilities related to TARGET accounts (net)" show a net liability position of €7,704,645 thousand, which comprises all TARGET positions. The change in this item is strongly influenced by the situation in 2003 that was described in Note 14. Liabilities related to other operational requirements within the Eurosystem On 31 December 2004 "Liabilities related to other operational requirements within the Eurosystem" refer exclusively to the seigniorage income of the ECB received in the first three quarters of 2004 and, in accordance with the decision of the Executive Board of 31 December 2004, entirely returned on the second working day of 2005. Banco de Portugal | Annual Report | 2004 Report and Financial Statements NOTE 8: Tangible and intangible fixed assets 31/12/2004 Tangible fixed assets Land Buildings and other constructions Premises Equipment Computer software Museum and art collections Intangible fixed assets Costs with rented buildings Assets under construction Tangible assets under construction Advances Total gross tangible and intangible fixed assets Accrued amortisations Depreciation of tangible fixed assets Depreciation of intangible fixed assets Total net tangible and intangible fixed assets 31/12/2003 8,851 74, 371 56,610 69,115 9,584 7,002 8,851 66,669 54,539 67,716 7,081 6, 862 225,533 211,717 38 82 8,362 31 16,229 74 8,392 16,303 233,963 228,101 (131,955) (15) (131,970) (121,006) (25) (121 ,031) 101,993 107,071 During the year ended on 31 December 2004 the movements in this item were as follows: 31/12/2003 Net balance 31/12/2004 Additions Disposals Depreciation for the year Net balance Tangible fixed assets Land Buildings and other constructions Premises Equipment Computer software Museum and art collections 8,851 - - - 8,851 44,212 14,196 15,606 985 6,862 7,730 2,071 4,992 3,174 140 242 4 - 2,426 3,950 6,901 1,719 - 49,516 12,318 13,455 2,437 7,002 90,711 18,107 246 14,995 93,578 56 - 30 4 22 16,229 4,894 12,760 - 8,362 74 - 44 - 31 16,303 4,894 12,804 - 8,392 107,071 23,001 13,080 14,998 101,993 Intangible fixed assets Costs with rented buildings Assets under construction Tangible assets under construction Advances Banco de Portugal | Annual Report | 2004 267 Report and Financial Statements NOTE 9: Other Financial Assets 31/12/2004 31/12/2003 Holdings in non-euro area resident entities Participating interest in the Bank for Internacional Settlements 12,920 12,920 Participating interest in euro area resident entities In Finangeste In the Pension Fund Management Company of the Banco de Portugal In Valora In Swift 36,425 1,125 375 24 36,425 1,103 375 24 Domestic securities of euro area residents denominated in euro 72,462 72,462 123,330 123,308 (29,147) (29,147) 94,183 94,161 Provisions for holdings in euro area resident entities The participating interest in Finangeste is covered by a provision for capital losses to the amount of €29,147 thousand. Domestic securities of euro area residents denominated in euro correspond to bonds originally issued by PARTEST (PARPÚBLICA – Participações Públicas (SGPS), SA.). NOTE 10: Off-balance-sheet instrument revaluation differences 31/12/2004 31/12/2003 Other forward transactions Price revaluation differences Purchase price and adjustments 476 4,799 - (23,663) Interest rate swaps Price revaluation differences 24,266 51,479 Accumulated write-downs from previous fiscal years (5,512) (10,671) Net balance sheet variations 19,230 21,944 The value recorded under "Net balance sheet variations" reflects the difference between asset and liability items of "Balance sheet variations from off-balance-sheet instruments". Therefore, the value of €19,230 thousand relating to 31 December 2004 represents the difference between €24,742 thousand recorded under assets (31 December 2003: €56,278 thousand) and €5,512 thousand recorded under liabilities (31 December 2003: €34,334 thousand). 268 The increase in the net value of "Other forward transactions" mainly results from the renegotiation of a large share of the portfolio, which led to the annulment of write-downs from previous years. This increase was offset by the decrease in the net value of interest rate swaps, due not only to the maturing of several operations, but also to the slight decrease in their market value. Banco de Portugal | Annual Report | 2004 Report and Financial Statements NOTE 11: Accruals and prepaid expenses 31/12/2004 31/12/2003 Accruals Interest and other income receivable from transactions denominated in foreign currency 25,938 43,178 101,405 36,920 127,342 80,099 3,245 13,993 15,235 12,261 Interest and other income receivable from transactions denominated in euro Prepaid expenses Prepaid expenses from transactions denominated in foreign curren cy Prepaid expenses from transactions denominated in euro Multi-annual projects - specialised services Other prepaid expenses Accruals refer essentially to the accrued interest on securities denominated in foreign currency and euro (€19,026 thousand and €55,434 thousand respectively), interest on the net position mentioned in section 1.2. j) of Note 1 related to the issuance of banknotes (€19,964 thousand) and the remuneration of the relative position relating to foreign reserve assets transferred to the ECB (€17,246 thousand). 7,560 4,878 39,510 52,585 65,549 83,718 192,892 163,816 Prepaid expenses refer essentially to the interest accrued up to the purchase date of coupon bearing securities, which were paid to the counterpart upon purchase and which will be received by the Bank at the maturity date of the respective coupon or upon the sale of the securities, if it occurs prior to the maturity date. Other prepaid expenses include €36,847 thousand regarding actuarial deviations related to pension schemes (see Note 33). NOTE 12: Other assets - Sundry 31/12/2004 Credit fallen due and other special credit situations 31/12/2003 98,110 98,452 Credit to the staff 127,413 125,930 Fluctuation of values relating to pensions 104,091 96,995 Sundry debtors 10,954 7,990 Corporate Income Tax - Payments on account 20,124 13,895 1,916 2,211 362,607 345,473 (98,110) (98,452) 264,497 247,020 Other reduced value accounts Provisions for credit fallen due and other special situations Banco de Portugal | Annual Report | 2004 269 Report and Financial Statements "Credit fallen due and other special credit situations" refers mostly to receivables from Finangeste under the Banco de Portugal/ Finangeste Arrangement of 9 January 1995, to the amount of €97,896 thousand (2003: €96,912 thousand). "Credit to the staff" corresponds mostly to loans to employees for house purchase. The balance regarding "Fluctuation of values relating to pensions" refers to pension schemes (see Note 33). "Corporate Income Tax – Payments on account" refers to the provisions of Articles 97 and 98 of the Income Tax Code (CIRC). NOTE 13: Banknotes in circulation Euro banknotes in circulation on 31 December 2004 represent the proportion held by Banco de Portugal of total euro banknotes in circulation in the Eurosystem (see section 1.2. i) of Note 1). NOTE 14: Liabilities to euro area credit institutions Current accounts of credit institutions with Banco de Portugal serve a two-fold purpose: they are current/settlement accounts and accounts where funds are deposited for compliance with the minimum reserve system, which are remunerated at the marginal rate of the Eurosystem’s main refinancing operations. The change in this item is essentially due to the fact that there is an exceptionally high balance on a credit institution’s current account with Banco de Portugal on 31 December 2003. Other liabilities to euro area credit institutions in euro include liabilities related to gold swap operations against euro. 270 NOTE 15: Debt certificates issued On 4 November 2004 the last tranche of debt certificates was repaid, to the amount of €1,053,661 thousand. Debt certificates corresponded to the certificates of deposit issued by Banco de Portugal in 1994, for the purpose of absorbing excess liquidity resulting from the cut in the reserve ratio. NOTE 16: Liabilities to other euro area residents denominated in euro The sub-item "General government" records exclusively the balance on the current account of the Directorate-General of the Treasury. "Other liabilities" includes the balances on current accounts of other financial intermediaries and financial auxiliaries with the Bank. NOTE 17: Liabilities to non-euro area residents denominated in euro This item includes liabilities in euro arising from gold swap operations, of €412,186 thousand, which together with the liabilities to euro area residents arising from these operations (see Note 14) account for an overall value of €521,749 thousand. The remaining balance on this item corresponds to the balances, denominated in euro, of the vostro accounts of international organisations (excluding the IMF) and several central banks. NOTE 18: Liabilities to euro area and non-euro area residents denominated in foreign currency These items reflect liabilities denominated in USD arising from gold swap operations against USD, whose end-of-period changes denote lower recourse to these operations. Banco de Portugal | Annual Report | 2004 Report and Financial Statements NOTE 19: Accruals and income collected in advance Income collected in advance 31/12/2004 31/12/2003 95 142 5,249 7,098 30,750 23,499 17,522 16,950 535 489 54,056 48,036 54,151 48,178 Accruals Interest and other costs payable in connection with transactions denominated in foreign currency Interest and other costs payable in connection with transactions denominated in euro Payroll accrual Supplies and services from third parties to be settled Interest and costs payable in foreign currency refer essentially to the accruals of the premiums calculated on swaps of gold against USD, which amounted to €4,974 thousand as at 31 December 2004 (2003: €6,338 thousand). Interest and costs payable in connection with transactions denominated in euro refer to the accruals of premiums calculated on swaps of gold against euro (€7,320 million), to the remuneration of reserve requirements since 8 December 2004 (€4,685 million) and to the remuneration of the intra-ESCB balance relating to TARGET in December 2004 (€18,745 million). NOTE 20: Other liabilities - Sundry 31/12/2004 Banknotes withdrawn from circulation 31/12/2003 230,614 245,192 Third parties 24,935 23,064 Estimate for income taxes 26,903 35,375 708 1,044 283,160 304,675 Other accounts of reduced individual value "Banknotes withdrawn from circulation" represents the Bank’s liability to the holders of the banknotes as long as these can be exchanged. Banco de Portugal | Annual Report | 2004 271 Report and Financial Statements NOTE 21: Provisions Movements in "Provisions" during the fiscal year ended on 31 December 2004 can be summarised as follows: Movements Balance as at 31/12/2003 Balance as at 31/12/2004 Increase Decrease Total 98,452 29,147 984 - 1,326 - (342) - 98,110 29,147 127,599 984 1,326 (342) 127,257 770,233 930,625 414,267 48,000 19,200 24,000 81,742 35,500 7,700 - (81,742) (35,500) 11,500 24,000 688,491 895,125 425,767 72,000 2,163,125 43,200 124,942 (81,742) 2,081,383 2,290,724 44,184 126,268 (82,084) 2,208,640 231 116,852 33,582 16(1) - (16) 33,582 215 150,434 117,083 33,582 16 33,566 150,649 2,407,807 77, 766 126,284 (48,518) 2,359,289 127,599 2,280,208 984 76,782 1,326 124,958 (342) (48,176) 127,257 2,232,032 PROVISIONS FOR RISKS Provisions to be deducted from assets Provisions for credit fallen due and other special situations Provisions for financial holdings Provisions recorded under liabilities Provisions for gold fluctuation risks Provisions for exchange rate risks Provisions for securities valuation risks Provisions for interest rate risks ADMINISTRATIVE PROVISIONS Provisions recorded under liabilities Provision for labour accidents Provision for other risks and costs Total provisions to be deducted from assets Total provisions recorded under liabilities (1) Directly used provision with no reflection on the profit and loss account. As regards movements in "Provisions"in 2004 the Bank reduced: (i) part of the provision for gold fluctuation risks, in proportion to the reduction in quantities; (ii) by €35,500 thousand the provision for exchange rate risks, and (iii) by €7,700 thousand the provision for securities valuation risks, these last two corresponding to the value of write-downs on foreign currency, securities and off-balance-sheet instruments, calculated at the end of 2004 and entered under profit and loss (see Note 26). Taking into account the prudential criteria set out in the PCBP and the Bank’s overall risk positions, in 2004 the Bank increased: (i) by €24,000 272 thousand the provision for interest rate risks, given the differential between internal and external rates and (ii) by €19,200 thousand the provision for securities valuation risks, in order to improve the coverage of predictable devaluations in the price of securities. Pursuant to Article 33.2 of the ESCB Statute, the Governing Council of the ECB may decide to offset a loss incurred by the ECB against its general reserve fund, and if necessary, against the monetary income of the relevant financial year in proportion and up to the amounts allocated to the national central banks. Banco de Portugal | Annual Report | 2004 Report and Financial Statements At its meeting on 13 January 2005 the Governing Council decided in principle to retain €1,360 million of NCBs’ monetary income pooled in January 2005 to offset the ECB’s loss for 2004. Accordingly, Banco de Portugal established a provision of €33,582 thousand in respect of its allocated monetary income for 2004 to be used to offset the ECB’s loss, equivalent to its weighting in the capital key of the ECB of 2.46927 per cent relative to the other NCBs within the Eurosystem. This provision was entered in the item "Provisions for other risks and costs", offset against the item "Net result of pooling of monetary income" (see Note 28), in compliance with the instructions issued by the ECB. Capital key (from 1/5/2004) Banque Nationale de Belgique Deutsche Bundesbank Weighted capital key subscription (from 1/5/2004) Monetary income retained 2.5502 3.5672 48,513.54 402,086.76 21.1364 29.5652 Bank of Greece 1.8974 2.6541 36,095.05 Banco de España 7.7758 10.8766 147,922.36 Banque de France 14.8712 20.8016 282,901.18 0.9219 1.2895 17,537.70 13.0516 18.2563 248,286.16 Banque Centrale du Luxembourg 0.1568 0.2193 2,982.87 De Nederlandsche Bank 3.9955 5.5888 76,008.10 Oesterreichische Nationalbank 2.0800 2.9095 39,568.73 Banco de Portugal 1.7653 2.4693 33,582.06 Suomen Pankki-Finlands Bank 1.2887 1.8026 24, 515.49 71.4908 100.0000 1,360,000.00 Central Bank and Financial Services Authority of Ireland Banca d’Italia The final decision on the mechanism for the coverage of losses incurred by the ECB, in compliance with Article 33.2 of the ESCB/ECB Statutes, will be taken by the Governing Council on 14 March 2005, when the ECB annual accounts will be approved. NOTE 22: Revaluation accounts Gold revaluation differences Foreign currency revaluation differences 31/12/2004 31/12/2003 1,116,820 1,395,828 7,114 836 Securities revaluation differences 13,337 6,884 Off-balance-sheet revaluation differences 24,742 56,278 Revaluation differences 1,162,013 1,459,827 The change in gold is chiefly due to the reduction in its physical stock (see Note 2), although the decline in the quotation of gold expressed in euro has also contributed to this reduction. Unrealised gains in foreign currency positions increased compared with the balance as at 31 December 2003, essentially due to shifts in the foreign currency investment portfolio, thereby Banco de Portugal | Annual Report | 2004 raising the weight of investments in currencies that appreciated against the euro. The decrease in off-balance-sheet revaluation differences is mainly due to the maturing of a significant part of the interest rate swap portfolio that showed unrealised capital gains at the end of 2003. 273 Report and Financial Statements NOTE 23: Capital and reserves Balance as at 31/12/2003 Increases Payment of dividends Transfers Balance as at 31/12/2004 1,000 - - - 1,000 71,737 - - 6,904 78,641 386,637 - - 183,224 569,860 Profit/(Loss) for 2003 69,043 - (34 ,522) (34,521) - Profit/(Loss) for 2004 - 70,033 - - 70,033 528,417 70, 033 (34,522) 155,607 719,535 Capital Legal reserve Other reserves The net profit for 2003 was placed according to Decision No. 562/04/MEF of 28 April of the Minister of State and Finance, as showed in detail in the table above. In accordance with Article 5 of the Organic Law of Banco de Portugal, a reserve must be established each year, with no fixed ceiling, formed out of 10 per cent of the profit for each fiscal year. The Board of Directors may establish other reserves and provisions, namely to meet depreciation risks or losses to which certain types of assets or operations are particularly exposed. Transfer to other reserves refers exclusively to appropriations included in the profit and loss 274 account for the reserve arising from gold transactions, in accordance with the provisions of Article 53 (1) of the Organic Law of Banco de Portugal, as amended by Decree-Law No. 50/ 2004 of 10 March, and with the Chart of Accounts of Banco de Portugal, approved by Decision No. 5850/2004 of 3 March of the Minister of State and Finance. In accordance with the decisions of the Board of Directors of Banco de Portugal of 20 May and 21 December 2004, this reserve, included in "Other reserves", was raised by €96,143 thousand and €59,464 thousand respectively (see Note 2). Banco de Portugal | Annual Report | 2004 Report and Financial Statements NOTE 24: Net interest income 31/12/2004 31/12/2003 152 563 Claims on non-euro area residents Securities Other 89,446 66,688 22,758 121,990 86,264 35,726 Claims on euro area residents denominated in foreign currency Securities Deposits 10,859 10,859 5,470 200 5,270 20,458 15,275 5,183 21,445 20,583 862 348,140 222,610 431,031 78,946 3,553 293,531 216,423 39,184 33,053 4,871 26,590 49,741 495,645 492,740 Liabilities to non-euro area residents denominated in euro 17,561 4,403 Liabilities to non-euro area residents denominated in foreign currency Liabilities denominated in USD dollar concerning gold swaps Other 10,687 9,523 1,164 21,111 20,002 1,109 Liabilities to MFIs denominated in euro Certificates of deposit Current accounts Other 85,727 17,853 67,865 9 123,456 47,557 75,710 189 0 (1) 190,060 180,571 649 647 2 5,107 5,107 - Off-balance-sheet instruments 3,768 16,096 Other liabilities to euro area residents denominated in euro 2,126 962 310,577 351,706 185,068 141,034 INTEREST INCOME Gold Claims on non-euro area residents denominated in euro Securities Other Claims on euro area residents denominated in euro Securities Lending to euro area MFIs Intra-Eurosystem claims Other Off-balance-sheet instruments INTEREST EXPENSES Treasury current accounts Intra-Eurosystem liabilities Liabilities to euro area residents denominated in foreign currency Liabilities denominated in USD dollar concerning gold swaps Other NET INTEREST INCOME Banco de Portugal | Annual Report | 2004 275 Report and Financial Statements NOTE 25: Realised gains/losses arising from financial operations Spot foreign exchange transactions Forward foreign exchange transactions Securities transactions Off-balance-sheet instruments Profits in forward foreign exchange transactions in 2003 and 2004 include results from gold transactions. In 2004 realised gains/losses in off-balancesheet instruments refer mostly to the advanced maturing of interest rate swaps. 31/12/2004 31/12/2003 (3,835) 158,894 16,200 39,212 (137,381) 59,321 43,300 13,711 (210,471) (21,049) In 2004 spot foreign exchange losses declined substantially in comparison with 2003, when there was a significant portfolio shift. NOTE 26: Write-downs on financial assets and positions Write-downs on securities Write-downs on off-balance-sheet instruments Write-downs on foreign currency Write-downs on off-balance-sheet instruments are mostly due to declines in the market value of contracted options. The fact that these writedowns are considerably lower than those recorded in 2003 is directly related to a renegotiation of the options portfolio in 2004. The value recorded in write-downs on foreign currency is due to the appreciation of the euro against some of the currencies that comprise the foreign currency investment portfolio, namely CAD , SDR and JPY. 276 31/12/2004 31/12/2003 5,840 1,864 35,507 4,629 23,663 102,363 43,211 130,655 NOTE 27: Income from equity shares and participating interests This item includes dividends received for the 2003 profit and loss, regarding the participating interest of Banco de Portugal in the Bank for International Settlements (BIS) (€2,171 thousand). In 2004, the ECB’s income on euro banknotes in circulation amounting to €733 million was fully retained by the ECB in accordance with a decision of the Governing Council and in view of the estimated ECB 2004 result. This item also reflects the decrease in the participating interest of the Banco de Portugal in accumulated net reserves of the ECB, which occurred on 30 April 2004, due to the change in the key for subscription of the ECB’s capital (see Note 7). Banco de Portugal | Annual Report | 2004 Report and Financial Statements NOTE 28: Net result of pooling of monetary income The amount of each Eurosystem NCB’s monetary income is determined by measuring the actual annual income that derives from the earmarkable assets held against its liability base. The liability base consists of the following items: banknotes in circulation; liabilities to credit institutions related to monetary policy operations denominated in euro; net intra-Eurosystem liabilities resulting from TARGET transactions; net intra-Eurosystem liabilities related to the allocation of euro banknotes within the Eurosystem. Any interest paid on liabilities included within the liability base is to be deducted from the monetary income to be pooled. The earmarkable assets consist of the following items: lending to euro area credit institutions related to monetary policy operations denominated in euro; intra-Eurosystem claims equivalent to the transfer of foreign reserve assets to the ECB; net intra-Eurosystem claims resulting from TARGET transactions; net intra-Eurosystem claims related to the allocation of euro banknotes within the Eurosystem; a limited amount of each NCBs’ gold holdings in proportion to each NCB’s capital key. Gold is considered to generate no income. Where the value of an NCB’s earmarkable assets exceeds or falls short of the value of its liability base, the difference shall be offset by applying to the value of the difference the average rate of return on the earmarkable assets of all Eurosystem’s NCBs taken together. The monetary income pooled by the Eurosystem is allocated among NCBs according to the subscribed capital key. In 2004 this allocation was conducted on the basis of two keys and in two different theoretical calculation periods; one from 1 January to 30 April and the other from 1 May to 31 December 2004. The difference between the monetary income pooled by Banco de Portugal, amounting to €196,028 thousand (€61,036 thousand and €134,991 thousand in the respective periods from 1 January to 30 April and from 1 May to 31 December), and reallocated to Banco de Portugal, amounting to €204,903 thousand (€64,296 thousand and €140,607 thousand in the respective periods from 1 January to 30 April and from 1 May to 31 December), is the net result arising from the calculation of monetary income. The net result arising from the calculation of monetary income in 2004 also reflects the share of Banco de Portugal relating to monetary income withheld to cover ECB losses in 2004 (see Note 21). NOTE 29: Other income 31/12/2004 31/12/2003 341 196 Previous fiscal years income 1,718 2,809 Sundry income 6,777 1,115 8,836 4,120 Other income Tangible and intangible fixed assets Other expenses Tangible and intangible fixed assets 31 10 Previous fiscal years expenses 2,925 3,946 Sundry expenses 5,657 8,359 8,613 12,315 224 (8,195) Banco de Portugal | Annual Report | 2004 277 Report and Financial Statements "Sundry income" includes in particular: (i) €4,704 thousand relating to receivables from Finangeste relating to claims recovered, under the contract for the assignment of debts (2003: €439 thousand) and (ii) €1,411 thou-sand of values debited within the scope of the supply of services to third parties (2003: €800 thousand). Previous fiscal years expenses include €1,281 thousand (2003: €1,281 thousand) relating to the depreciation for the year regarding liabilities for pensions of active employees on 31 December 1994, with presumable date of retirement after 31 December 1997 (see Note 33). "Sundry expenses" essentially include: (i) €5,000 thousand relating to pension schemes, recognised as a cost (2003: €4,501 thousand), in accordance with the provisions of Notice of Banco de Portugal No. 12/2001 of 9 November (see Note 33); (ii) the reimbursement to Finangeste of the costs incurred in the recovery of claims to the amount of €488 thousand (2003: €3,686 thousand). NOTE 30: Staff costs 31/12/2004 31/12/2002 Remuneration of the members of the Board of Directors 1,386 1,393 Employees' salaries and Board of Auditors 67,122 66,440 Compulsory social charges 29,779 27,069 Volunatry social charges 7,634 7,220 Other staff costs 3,085 3,201 109,006 105,323 Compulsory social charges include expenditure on the Pension Fund to the amount of €15,948 thousand (2003: €13,463 thousand), which, in addition to expenditure on Base Schemes, include expenditure on wage supplements (see Note 33). As at 31 December 2004 the Bank employed 1,736 staff (2003: 1,786). Among these, 49 are on secondment, on assignment and on unpaid leave, 17 are assigned to Valora and 36 to Sociedade Gestora do Fundo de Pensões (Banco de Portugal’s Pension Fund Management Company). NOTE 31: Income tax The Bank is subject to the Corporate Income Tax and to a Local Tax. The Corporate Income Tax for 2004 was calculated on the basis of a nominal tax rate of 25 per cent, taking into account all accruals and deductions which are part of the taxable income. The value of the tax on profits, calculated according to the best estimates available, was €26,903 thousand. 278 Tax authorities have the possibility of reviewing the Bank’s situation with regard to taxes for a period of four years. Therefore, as a result of different interpretations of the tax legislation, there can be additional payments for the years 2001 to 2004. However, the Board firmly believes that there will be no additional significant payment regarding the aforementioned fiscal years. NOTE 32: Off-balance-sheet instruments In addition to other off-balance-sheet instruments, the Bank, in the performance of its tasks, uses derivative financial instruments chiefly intended to manage risks associated with its assets, liabilities and off-balance-sheet instruments. These instruments normally have an underlying (i) market risk inherent in price or interest rate fluctuations and a (ii) credit risk, generally corresponding to the advance settlement or replacement cost of the contracts at current market prices and rates. Banco de Portugal | Annual Report | 2004 Report and Financial Statements On 31 December 2004 and 31 December 2003 the Bank had the following transactions outstanding: 31/12/2004 31/12/2003 Market value (2) Contract value (1) Effect on P&L Accrued accounts (3) interest (4) Contract value(1) Purchases Sales Net Net Net Purchases Sales 32,607 32,607 - - - 4,864 4,864 Interest rate swaps 776,894 776,894 18,753 24,266 3,807 1,226,311 1,226,311 Other forward transactions 954,570 - 476 476 - 1,325,758 698,730 Foreign exchange and interest rate transactions Forward transactions (1) Theoretical or notional value. (2) The market value corresponds to the potential income or cost in which the Bank would incur in the event it had to settle these transactions, and considering the current market conditions and evaluation models currently used. (3) The effect on results corresponds to the impact on the profit and loss account in the event the Bank had to settle these transactions, and considering the current market conditions and evaluation models currently used. (4) The value of accrued interest corresponds to interest receivable and payable accrued until the balance sheet date resulting from transactions outstanding. NOTE 33: Retirement and survivors pensions In accordance with the regulations in force and under the terms of the several pension schemes with defined benefits, the Bank is responsible for the payment of retirement, disability and survivors pensions to its employees or their dependants, since they are not, in general, covered by the State Social Security System. Through the Fund, Banco de Portugal ensures beneficiaries the right to a pension, resulting from the sum of the percentages calculated according to each component of pensionable earnings. Taking into account the different benefits, according to the Bank’s hiring date and the different types of remuneration, seven defined benefit schemes were set up, which are divided into: Base Schemes, that ensure retirement and survivors benefits resulting from the base remuneration and Wage Supplement Regimes, which are intended to provide for the payment of retirement and survivors benefits arising from this type of remuneration. The schemes/regimes are characterised as follows: Banco de Portugal | Annual Report | 2004 Base Schemes Scheme I: This scheme covers all employees hired up to 31 December 1994. From that date, no more members were admitted to this scheme, which therefore became closed. It is a non-contributory scheme, insofar as employees do not contribute to its funding, given that this obligation is exclusively incumbent on Banco de Portugal. The benefits offered by this scheme consist in attributing an employee a retirement pension equal to the total last basic salary, upon reaching normal retirement age, because of disability or early retirement, as well as a survivors pension to dependants of deceased employees (either active or retired). Scheme II: This scheme entered into force on 1 January 1995 and covers employees hired after this date, which do not come from other credit institutions covered by the "Acordo Colectivo de Trabalho Vertical" (ACTV), i.e. the collective wage agreement prevailing for the banking sector, as far as social security matters are concerned. This is a contributory scheme, insofar as employees 279 Report and Financial Statements participate in its funding with 5 per cent of their pensionable salaries, as laid down in Clause 137-A of ACTV, while the rest is paid by Banco de Portugal. This scheme gives the right to a retirement pension calculated according to the last basic salary and proportional to the years of service, as well as a survivors pension to dependants of deceased employees (either active or retired). Scheme III: This scheme covers the members of the Board of Directors and started on 1 February 1998, when Law No. 5/98 of the Organic Law of Banco de Portugal of 31 January entered into force. It is a contributory scheme, where members participate in its funding with a percentage determined on the basis of the rate fixed in Clause 137-A of ACTV. Benefits depend on the years of service. Scheme IV: This scheme includes all employees who, although having been hired after 31 December 1994, come from other credit institutions covered by ACTV as far as social security matters are concerned. This scheme is the result of the merger of Schemes I and II, given that it is a non-contributory scheme but offers benefits proportional to the years of service. Pensionable Wage Supplement Regimes Since 2002 the Pension Fund has been the main funding vehicle of retirement and survivors benefits related to wage supplements. Pensionable wage supplement regimes cover all the Bank’s employees who earn a wage supplement and who have chosen this severance scheme. All these regimes translate into defined benefit schemes, given that the benefits they offer, regarding either retirement or survivorship, are previously established, i.e. the promised benefit is fixed while its cost is variable. These regimes are contributory, given that employees participate in their funding with a monthly contribution directly related to the wage supplement. 280 General regime: This regime covers staff hired by Banco de Portugal as from 1 January 2001. This is a contributory regime, to which Banco de Portugal and the employees both contribute, including for risks associated with disability and death, with 60 and 40 per cent respectively, and the employee’s contribution shall not exceed 10 per cent of the wage supplement earned. The benefits offered by this regime consist in attributing a retirement pension (without the possibility of capital redemptions) calculated on the basis of the last wage supplement and proportional to the period of contribution, as well as a survivors pension to dependants of deceased employees (either active or retired). Special regime A: This regime covers staff hired by Banco de Portugal up to 31 December 1998 and, like the general regime, it is a contributory regime. However, unlike the latter, disability and death risks are only funded by Banco de Portugal. Benefits offered by this regime consist in (i) attributing a retirement pension equal to 85 per cent of the last wage supplement, upon reaching normal retirement age or because of early retirement, or (ii) calculated proportionally to the years of service for pension purposes (at least 50 per cent of the wage supplement), because of disability, as well as (iii) attributing a survivors pension to dependants of deceased employees (either active or retired). On retirement, employees can opt for the capital redemption of 1/3 of the pension to which they would have been entitled, while the remaining 2/3 are attributed as a pension. Special regime B: Special regime B covers staff hired by Banco de Portugal between 1 January 1999 and 31 December 2000. With regard to the sharing of contributions by Banco de Portugal and the employees, limitation of employees’ contributions and coverage of shared risks, it fully coincides with the mechanism applicable to Special regime A. With regard to benefits, this regime coincides with the General regime, except for the fact that it enables the employee to opt for the capital redemption of 1/3 of the total amount. Banco de Portugal | Annual Report | 2004 Report and Financial Statements The number of participants in the base schemes and in the policy / pensionable wage supplement regimes promoted by Banco de Portugal is shown in the table below: The main actuarial assumptions used in the actuarial calculations are the following: Assumptions used (%) 2004 Number of participants Schemes Active staff Staff in retirement and Pensioners Discount rate 2003 4.161 4.780 5.150 5.300 - Scheme III 1.731 1.890 - Other Schemes and Regimes 2.231 2.390 1.731 1.890 Expected return Base Schemes Scheme I Scheme II on the Fund's assets 1,432 2,191 291 1 Scheme III 5 6 Scheme IV 9 - Pensionable wage Expected wage growth rate Pension discount rate supplement regimes Special regime A 1,550 157 Special regime B 53 1 General regime 93 - Insurance policy 31 - Tables used - mortality - disability TV 73/77 1978 - S.O.A. Trans. male (US) - turnover Liabilities arising from pension schemes funded through the Fund were calculated in an actuarial calculation prepared by Sociedade Gestora do Fundo de Pensões (Banco de Portugal’s Pension Fund Managing Company), in accordance with the provisions laid down in Notice of Banco de Portugal No. 12/2001 of 9 November, supplemented by Notice of Banco de Portugal No. 7/2002 of 31 December. For this purpose, the Projected Unit Credit calculation method was used. Banco de Portugal | Annual Report | 2004 - Scheme III - - Other Schemes and Regimes T-1 Crocker Sarason (US) Liabilities for retirement and survivors pensions relating to base schemes and wage supplements regimes and the financial situation of the Fund as regards the coverage of these liabilities are summarised as follows: 281 Report and Financial Statements 31/12/2004 31/12/2003 Liabilities Pension liabilities Base remuneration Wage supplements 548,951 497,055 527,467 483,810 21,484 13,245 491,958 472,899 Base remuneration 370,589 357,110 Wage supplements 121,369 115,789 1,040,909 969,954 1,281 1,281 10,251 11,532 940,601 898,722 Past-service liabilities – active employees Total liabilities Non-recognised liabilities (Notice No. 6/95) Value recognised in the fiscal year Outstanding value regarding active staff on 31 December 1994 with presumable retirement after 31 December 1997 Value of the Fund Value at the beginning of the year Contributions paid to the Fund Current contributions Extraordinary contributions Pensions paid Net income of the Fund Value at year-end 17,614 31,873 17,614 17,873 - 14,000 (40,626) (36,953) 94,628 46,959 1,012,217 940,601 Funding levels Overall coverage rate 97.2% 97.0% Coverage rate (with deferred liabilities – Notice No. 6/95) 98.2% 98.1% 100.6% 100.6% Coverage rate – Notice No. 12/2001 In accordance with the legislation in force, Banco de Portugal funds its liabilities with active employees on 31 December 1994, with presumable date of retirement after 31 December 1997, through an amortisation plan of uniform annual instalments, calculated for a number that results from the differential between the average presumable age of retirement and the average age of that population group, with a maximum of 20 years. As at 31 December 2004 the outstanding value amounts to €10,251 thousand, with 8 future instalments (31 December 2003: €11,532 thousand). 282 The costs recognised in the fiscal year relating to Base Schemes and Pensionable Wage Supplement Regimes amount to €22,228 thousand, as shown in the table below. This amount relates to the depreciation for the year equivalent to 10 per cent of the accumulated amount of prepaid expenses, in December 2003, regarding actuarial deviations deferred from previous fiscal years and the depreciation imputed to the fiscal year regarding liabilities with deferred coverage, which are recognised as described in section 1.2. m) of Note 1. Banco de Portugal | Annual Report | 2004 Report and Financial Statements Costs and losses recognised in the fiscal year Current service cost Interest cost Expected return on the Fund's assets (see Note 30) 2004 2003 16,970 47,378 15,670 45,516 (48,400) (47,722) 15,948 13,463 Depreciation for the year of the accumulated amount of prepaid expenses regarding actuarial deviations deferred from previous fiscal years 5,000 4,501 Depreciation of liabilities with active staff on 31 December 1994 with presumable retirement after 31 December 1997 1,281 1,281 6,281 5,782 22,228 19,245 (see Note 29) Banco de Portugal | Annual Report | 2004 As at 31 December 2004, according to the accounting principles mentioned in section 1.2. m) of Note 1, the value recorded under "Fluctuation of items" showed an accumulated value of €104,091 thousand, which corresponds to the ceiling set in Notice No. 12/2001 (2003: €96,995 thousand). In this fiscal year the value of actuarial deviations related to differences between assumptions and realised values that exceeded the ceiling amounted to €27,598 thousand and it was recorded in "Other prepaid expenses" (2003: €8,752 thousand). Despite this increase in liabilities, the amount recorded in "Other prepaid expenses" regarding liabilities with the Pension Fund (see Note 11) declined significantly in 2004, as a result not only of the depreciation of the 2003 balance, but also of recognised positive deviations referring to the change in the actuarial assumption regarding the presumable age of retirement (€35,750 thousand). The final amount recorded under this item, regarding liabilities with the Pension Fund, was €36,847 thousand at the end of 2004 (2003: €49,998 thousand). 283 Report and Financial Statements 9.4. External Auditor's Report 284 Banco de Portugal | Annual Report | 2004 Report and Financial Statements 9.5. Report and opinion of the Board of Auditors In accordance with the provisions laid down in Article 43 (1) (c) of the Organic Law of Banco de Portugal, the Board of Auditors submits its report and issues its Opinion on the report of the Board of Directors and the Financial Statements for the year ended on 31 December 2004, which were approved by the Board of Directors, at its meeting on 8 March 2005. Report 1. The Board of Auditors, in use of the powers conferred on it, and similarly to past years, monitored with the required frequency the day-to-day operation of the Bank, through the participation, without voting rights, of its members in the ordinary weekly meetings of the Board of Directors and through the analysis of the documentation produced, namely by the Control and Accounting Department and by the Audit Department. The analysis of the monthly accounting data also enabled the Board of Auditors to monitor the management and the evolution of the assets and financial position of the Bank. The checks of existing assets and valuables held by the various areas of the Bank continued to be made by the officials in charge and by the Audit Department, with a prior programming. The Board of Auditors monitored the end-ofyear inspection of valuables carried out at the Bank’s head office in Lisbon, at its Oporto branch and at the Carregado Complex. The Board of Auditors appraised, at its regular monthly or extraordinary meetings, data reported to it, preparing working documents and issuing opinions or making recommendations, whenever necessary, as described in the respective minutes. Opinions were also issued on the Bank’s Operating Budget for 2005 and on a proposal for the adjustments to be introduced in the Chart of Accounts of Banco de Portugal (PCBP). In addition to the functions entrusted to it by the Organic Law of Banco de Portugal, the Board of Auditors, pursuant to the provisions of specific legislation, continued to monitor the operation and to issue its opinion on the report and annual Banco de Portugal | Annual Report | 2004 accounts of the Mutual Agricultural Credit Guarantee Fund, the Deposit Guarantee Fund and the Mutual Counterguarantee Fund. 2. The Bank’s activity is explained in the Report of the Board of Directors, which also contains comprehensive information on the Financial Statements of the 2004 fiscal year. The "Notes on the financial statements" include detailed information on both the financial statements and the main accounting policies and valuation criteria. With regard to the accounts related to the main operating areas of the Bank, the PCBP covers the principles, criteria and techniques set out by the European Central Bank for the European System of Central Banks. With respect to the analysis of the Balance Sheet and Profit and Loss Account and comparing with data as at 31 December 2003, mention should be made to the following: (a) the increase in Assets of €2,247,291 thousand in "Intra-Eurosystem claims", essentially associated with "Net claims related to the allocation of euro banknotes within the Eurosystem"; (b) the decrease in Assets of €748,200 thousand in "Balances with banks and security investments, external loans and other external assets" and of €713,771 thousand in "Gold and gold receivables"; (c) the increase in Liabilities of €7,268,207 thousand in "Intra-Eurosystem liabilities", essentially associated with TARGET accounts and of €1,856,390 thousand in "Banknotes in circulation"; (d) the decrease in Liabilities of €1,053,661 thousand in "Debt certificates issued" and of €737,201 thousand in "Liabilities to non-euro area residents denominated in foreign currency" and of €328,347 thousand in "Liabilities to non-euro area residents denominated in euro"; (e) the increase in the Profit and Loss Account of €44,034 thousand in "Net interest income"; (f) the positive effect in the Profit and Loss Account of €38,994 thousand related to "Transfer to/from provisions for exchange rate and price risks and other provisions and reserves"; and (g) the decrease in the Profit and Loss Account of €45,348 thousand in "Net result of financial operations, write-downs and risk provisions" and of €37,857 thousand in "Net result of pooling of monetary income". 285 Report and Financial Statements The accounts of Banco de Portugal were marked by the conditions prevailing in international financial markets and important management decisions regarding the composition of its assets portfolio: • In the financial markets, the depreciation trend of the US dollar against the major currencies (namely the euro) continued in 2004, and so did the low levels of interest rates in the euro area. Developments in gold quotations were positive in US dollars, although they were mitigated, or even countered in year-end values, when converted into euro. These price developments in financial markets determined reductions in unrealised capital gains in gold operations and in write-downs on foreign currency and euro portfolios (writedowns are recognised as losses for the year). • With regard to internal management decisions, special mention should be made to the reduction of the interest rate risk exposure, as a result of the decrease in the duration of the various portfolios, in order to prevent possible adverse effects of protracted interest rate rises. The recomposition of financial assets managed by the bank was also continued, taking into account the reduction of the exchange rate risk. • Under the Central Bank Gold Agreement of 26 September 1999, renegotiated in 2004, the Bank sold 55 tons of gold. In accordance with the provisions of Article 53 (1) (b) of the Organic Law of Banco de Portugal capital gains in gold sale operations are allocated to the building up of a special reserve related to these gains. As a consequence, capital gains in 2004 (€155,606 thousand) were entirely credited to reserves. 3. In 2004 Banco de Portugal recorded a profit of €70,033 thousand, i.e. an increase of €990 thousand compared with that recorded in the 2003 fiscal year. The Profit and Loss Account shows the contribution of each item to "Net profit/ loss for the year". As regards the distribution of 2004 results, according to the provisions laid down in Article 53 (2) of the Organic Law of Banco de Portugal, the Board of Directors proposes the following distribution of profit: • under the terms of sub-paragraph a): 10% to the legal reserve (€7,003,309.38); • under the terms of sub-paragraph b): 10% to other reserves (€7,003,309.38); • under the terms of sub-paragraph c): 30% to other reserves (€21,009,928.14) and 50% to the State, as dividends (€35,016,546.90). 4. The external auditors issued no reserves in their report. Opinion In view of the data shown and on the basis of analyses carried out and information obtained, the Board of Auditors raises no objection to the approval of the 2004 Balance Sheet and Accounts nor to the proposal for the distribution of profit. The Board of Auditors wishes to express to the Governor, the Board of Directors and the staff of the Bank its appreciation for their co-operation. Lisbon, 21 March 2005 BOARD OFAUDITORS 286 Banco de Portugal | Annual Report | 2004
